142375_riskmap_report_2010

RiskMap 2010

Published by Control Risks, Cottons Centre, Cottons Lane, London SE1 2QG. Control Risks Group Limited ('the Company') endeavoursto ensure the accuracy of all information supplied. Advice and opinions given represent the best judgement of the Company, butsubject to Section 2 (1) Unfair Contract Terms Act 1977, the Company shall in no case be liable for any claims, or special, incidentalor consequential damages, whether caused by the Company's negligence (or that of any member of its staff) or in any other way.Copyright: Control Risks Group Limited 2009. All rights reserved. Reproduction in whole or in part prohibited without the prior consentof the Company. All maps are copyrighted by Control Risks Group Limited and Collins Bartholomew 2009.

RiskMap: 2010

Introduction 1

Risk and the recovery 3

Background: Not a normal recession 3

Sovereign debt 5

Jobs and bread 7

Protectionism 9

Lingering external risks 10

Key issues for investors 11

Leadership transitions: Family fortunes 12

Through a glass, darkly 12

Potential tinderboxes: Algeria, Cameroon, Iran, Yemen, Zimbabwe 14

Elite power struggles: Angola, Equatorial Guinea, Libya, Tunisia, Uzbekistan 15

Continuity and change: Egypt and Burma versus Cuba and North Korea 16

Moving towards mitigation 17

Mapping the new terrain of global Islamist terrorism 18

What is al-Qaida now? 18

Al-Qaida under pressure 18

Outsourcing and localisation 19

Implications and mitigation 21

International anti-corruption laws: are they really working? If so, how? 24

Enforcement from the US… 24

…and the rest 25

Developing and transition economies: tackling the ‘demand side’? 26

Get me a compliance programme! 28

Dealing with business partners 28

Just say ‘no’, from a safe distance? 29

The way forward: moving beyond compliance to real engagement 30

China’s latest, greatest leap – out into the world 31

Going out 31

Seeking stable supply 33

Pursuit of profit, or ‘grand strategy’? 33

Not all plain sailing 34

Testing the limits 35

Eyes on Asia 35

Money talks 36

Regional overviews 37

Africa 37

Americas 40

Asia 44

Europe and the CIS 47

Middle East and North Africa 50

Risk rating forecasts for 2010 54

Risk rating definitions 54

PAGE 1RISKMAP 2010

2010 will be a year of uncertain transition for business. The causes of the global recession arenow well understood. The contours of the economic recovery, by contrast, are far from clear, andare likely to vary widely by country and region in developed and emerging markets alike.

Although G20 members have not challenged the fundamentals of free trade and the movementof goods, labour and capital, the return to growth will be partial and protracted, and over-dependenton governmental stimulus measures, which may not last indefinitely. Our lead article pinpointshow a structural rise in unemployment will represent a key macro-political and security risk in2010, even in states such as China, where growth has remained relatively solid. Insecuregovernments may target business, particularly foreign investors, to cover the unemployment lagthrough official pressure to assist state-owned partners or to keep uneconomic production linesopen. Companies will need to ensure that their political intelligence is second to none to anticipateany potentially unwelcome trends.

Effective planning and security management more essential than ever

Other emerging risks are slow-burning. The possible departure from office of ageing leaders inauthoritarian states can be among the more difficult to navigate. Certain regions may face multipleleadership transitions in 2010. Where there is no clear precedent for succession, or whereinstitutional frameworks are underdeveloped or contested, businesses may suffer collateral damagein the competition for influence between elite factions. In such cases, there is no substitute forthorough preparation. Investors must ensure that they map out relations between key playersbefore any succession struggle and, most importantly, receive constantly updated analysis toavoid being caught cold when the music stops. Where a tradition of civil protests or militaryintervention further complicates the landscape, business should incorporate a hard securitydimension to its scenario planning.

Effective security management is also central to mitigating the threat from terrorism. In this year’sRiskMap, we analyse how evolving recruitment, organisational and financing patterns in jihadinetworks are changing threat location and target selection. As the direction provided by al-Qaida’scentral leadership becomes increasingly confined to propaganda, and its sanctuaries potentiallydiminish, we argue that the growth of home-grown networks poses a new form of threat to business,requiring a recalibration of counter-terrorism policy and security management.

Evolving policy frameworks

Policy developments will also be at the heart of transitions in the business regulatory environment.It remains unclear whether a substantive agreement can be reached at the December 2009 UNFramework Convention on Climate Change summit in Copenhagen. Assuming an 11th-hourcompromise is stitched together, enforcement of tighter environmental regulations will fall tonational governments, which may then use them as part of separate resource nationalist agendasto target foreign investors.

Meanwhile, there will be developments in anti-corruption legislation, with the centrepiece in 2010likely to be the passage of the British government’s anti-bribery bill. Although tighter legislationand better enforcement is critical to reducing corruption, we argue that formal compliance isinsufficient to mitigate risks generated by local business partners, commercial agents andconsultants working with customs agencies. Businesses will need to strengthen their integrityprogrammes to raise professional standards and ensure that there is a culture of honest business,rather than simple adherence to often imperfectly enforced laws.

Meanwhile, China will continue its game-changing rise. Although still a modest foreign investor interms of volume, the scale of Chinese ambition is necessitating its adoption of a more sophisticatedand nuanced foreign policy to match its growing commercial reach. The Chinese business offer –based on personal ties, inter-governmental agreements and respect for national sovereignty –will also need to evolve to accommodate growing diversification beyond the extractive sectors,and the requirement to adopt a more granular business approach to secure maturing infrastructureprojects on the ground.

Introduction

PAGE 2 RISKMAP 2010

Global recovery de-sychronised

While continuing demand in China and its regional ambitions have propped up the prices ofmajor industrial commodities, vital to the stability of many emerging markets, our regionaloverviews underline the de-synchronisation of the global recovery. Latin America has confoundedmany sceptics with its political and economic resilience. Political institutions have proven to bemore firmly moored than was thought, and there has been no substantial lurch to populism asmany feared. However, while ‘hard’ political risks may be less acute, graft, crime and the traditionof labour activism present enduring project-specific risks in many sectors.

Despite its embedded deficiencies of security, governance and infrastructure, Africa has alsoproven to be less negatively affected by the recession than was forecast. Nevertheless, keyinvestment destinations face moments of truth in 2010: the truce agreed between the Nigeriangovernment and Niger delta militants will shape the trajectory of the domestic oil sector; thestates of the Great Lakes region are on the cusp of creating a zone of regional economic co-operationout of a security nightmare; and South Africa’s hosting of the football World Cup is an opportunityto showcase the continent’s potential.

Much of the Middle East and North Africa was also shielded from the worst effects of the recession.Here economic stability will, in many cases, continue to be bound up with movements in globaloil prices, with the prospects of a comprehensive breakthrough over Israel/Palestine still remote.The odds are still stacked against Iran reaching an accommodation with the international communityover its nuclear ambitions, but those odds shortened somewhat in 2009 as the US administration’spolicy of blending pressure and incentives became more refined. Crucially, key international players,particularly Germany and Russia, may be more willing to come into alignment, though China’slong-term Iran strategy remains opaque. Moreover, the Iranian regime is a past master at delayand obfuscation, partially reflecting disagreements inside the system. However, were a deal to bestruck, Iran would undoubtedly represent a truly significant global renewal opportunity for internationaloil companies, with a domestic market of huge potential.

A multitude of political, security and operational risks converge in Asia. The Afghanistan-Pakistanborder region will remain central not only to the region’s security, but to global counter-terrorisminitiatives. A successful military offensive in Pakistan’s tribal regions is still unlikely to shift thegovernment’s calculus on the need for strategic depth, even with the elimination or decanting offoreign terrorist elements.

China aside, many of the region’s economies rebounded well from the crisis, though the newJapanese administration faces a particularly tough challenge in re-gearing the economy intorecovery. The stable political transitions in India and Japan in 2009 will stand in stark contrast tothose in the Philippines, Sri Lanka and, possibly, North Korea, all of which could become turbulent,albeit for widely differing reasons. Meanwhile, with its new-found political stability, vast domesticmarket and natural resource endowment, Indonesia is the Asian player to watch in 2010.

In Europe, political discourse has centred on the role of the state after the crisis. Paradoxically,the traditionally interventionist Russian state will look to divest itself of non-strategic assets, creatingnew opportunities for investors with higher risk appetites, while in Western Europe even thosegovernments moving solidly into growth may grudgingly continue to shoulder distressed assetson sovereign balance sheets.

Therein lies the complexity of the post-crisis business environment: the variable rate and shapeof the unfolding recovery presents diverse challenges to businesses. Confronted by tighteningregulatory regimes, unsettled social environments, weak governance and changing securitythreats, it has never been more vital for investors to get a grip on political, security and operationalrisk. Time and again history has proven that political instability comes not at the depths of theeconomic cycle, but during the initial upswing, when political and economic expectations are notmet by reality.

Michael Denison, Research DirectorLondon, November 2009

PAGE 3RISKMAP 2010

Risk and the recovery

After a year consumed with avoiding a ‘second Great Depression’, the post-crisis outlook seemsrather anti-climactic. Capitalism remains intact, and major developed and emerging economiesstill embrace globalisation, free trade and foreign investment. The world is preoccupied withlong-standing threats like nuclear proliferation, transnational terrorism and pandemics. As weanticipated, the financial crisis did not implode economies, topple governments and fomentsocial unrest. Glimmers of positive growth are on the horizon.

But don’t count your chickens just yet: the economic, political and security consequences of therecession are still developing. As we shift from weathering the crisis to restructuring and rebuilding,underlying changes in the business environment will surface. Opportunities will undoubtedlyemerge as governments strive to attract foreign investment, nurture new industries and streamlineinefficient enterprises. But changing risks, from new regulatory requirements to underlyingchanges in social stability, will continue to pose strategic and operational challenges for business.

Climbing out of the so-called Great Recession will not be easy. Global trade and investment areanaemic, core financial institutions remain fragile, and unemployment and poverty will continue torise in 2010. Growth still relies heavily on government intervention, putting politics at the heart ofany recovery. As fiscal and monetary pressures continue to mount next year, so too will socialand political trade-offs that could increase the risks of default, unrest and political instability.Furthermore, the sheer interconnectedness of the global economy, acutely demonstrated by thefinancial crisis, means that no country can simply ‘go it alone’. Even as emerging markets lookpoised to rebound rapidly, weak demand in the US and Europe will undermine traditional commodity and manufacturing export sectors, as well as vital remittance flows. The robustinternational co-operation forged during the crisis could also come under strain from protectionismand efforts to rebalance the global economy. Finally, economies will remain vulnerable to anyother potential blow – whether financial crisis, natural disaster, oil-price shock, military conflict ormajor terrorist attack. Despite the economic trauma, however, the world remains open for business.

Global exports and FDI, 2007-09 ($bn)

Source: WTO, UNCTAD

Background: Not a normal recession

Recessions – contractions in economic activity – can be produced by several kinds of economicshock. The oil crises of the 1970s, for instance, caused particularly sharp downturns worldwide,while emerging markets (and the UK) were the main victims of debt and currency crises in the1980s and 1990s. Even geopolitical events contribute to recessions: the September 2001 terroristattacks exacerbated the collapse of the dotcom bubble in 2001. The most serious recessions and

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PAGE 4 RISKMAP 2010

weakest recoveries, however, tend to follow banking and financial crises, while synchronisedrecessions are on average even longer and more severe. Financial crises combined with synchronousrecessions, not surprisingly, have the worst track record. As record declines in output, trade, assetvalues and investment over the last year attest, this recession is no exception: it is being feltmore widely and more deeply than any in the last 80 years.

Postwar global recessions in perspective

Source: Kose et al, Finance and Development, 2009

The financial crisis that sparked off the recession marked a convergence of global trends. One isa sizeable shift in global output from wealthy countries to developing countries. G7 countriesproduced more than two-thirds of world GDP in the 1980s and 1990s, but today produce aroundhalf. The underlying reason is that growth rates for developed and developing countries – thoughstill correlated – diverged widely in the last decade as emerging markets took off. China andIndia alone more than doubled their share of world GDP. Concurrently, globalisation has knitnearly all economies more tightly together, allowing a consumer debt crisis in the US mortgagemarket to infect banking in Europe, collapse trade in Asia and Latin America, and sink commodityexports from Africa and the Middle East. Finally, the recession was spurred on by an unprecedentedpeak in oil prices. Unlike previous oil crises created by geopolitics, the 2008 spike largely reflecteddemand outstripping supply – itself a consequence of rapid emerging-market growth.

The crisis was unique for another important reason: the size, speed and international co-ordinationof government interventions. Massive monetary injections and co-ordinated interest-rate cuts arecredited with preventing a banking implosion in core economies and keeping credit channels atleast partly open. Many countries – notably the US and UK – also guaranteed bank assets andeven purchased toxic securities, taking private risk on to the sovereign balance sheet. Dramaticincreases in IMF and development bank financing helped to stabilise economies on the brink ofcollapse, especially in Central and Eastern Europe. G20 commitments to free trade largelydeflected knee-jerk protectionism. Many governments also expanded social safety nets andlaunched economic stimulus measures (totalling around $2 trillion globally), shoring up domesticdemand, bolstering key industries and taking over as the economic engine.

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PAGE 5RISKMAP 2010

G20 discretionary fiscal stimlus spending, 2008-10

Source: IMF

Sovereign debt

Having rescued the global economy, governments are now at its mercy. Spending rose dramatically toconfront the crisis even as tax receipts fell sharply on declining trade, commodity prices, householdincomes and corporate profits. To meet financing needs, local and national governments borrowedheavily, both at home and abroad. Others drained reserves and sovereign wealth funds. Debt levelssoared. Given a strong recovery, governments could safely withdraw stimulus spending and begin torestore fiscal balance. During a weak recovery, however, governments will be unwilling to cut spendingfor fear of slowing growth or fomenting social unrest. Neither will many find it easy to boost exports orborrow abroad to meet short-term financing needs. A weak recovery, therefore, compounds the risk ofa sovereign default, restructuring or revaluation – and not just for the usual suspects.

Number of debt crises, currency crises and preceding bank crises

Source: US Energy Information Administration (EIA)

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Global recession

PAGE 6 RISKMAP 2010

The debt overhang is worst in developed countries. Debt rose more during the recession than atany time since the Second World War, now exceeding GDP by 15%. The US anticipates a $3trillion combined budget deficit for 2009-10, about half stemming from increased spending onsocial programmes, a $787bn stimulus package and cash injections into the financial system.Europe ramped up spending by about €400bn, with 20 member states set to breach the EU’s 3%statutory cap on budget deficits. The EC raised particular concern about the UK’s deficit, whichmore than doubled during the crisis. Nonetheless, the US, UK and other large Europeaneconomies can still borrow abroad and have relatively good track records of fiscal management.Deficit reduction remains a medium-term concern, but one that depends substantially on theprogress of efforts to ‘rebalance’ the global economy.

More pressing are hard-hit emerging economies in Eastern Europe, Central Asia and LatinAmerica, many of which were bailed out by the EU, IMF and World Bank after capital inflowsdried up. In some of these countries, financing went to support social programmes and statepensions. This creates a basic problem: countries are expected to cut deficits as part of a loanagreement, but this often collides with domestic political and economic priorities. For example,trade unions and opposition parties in Ukraine rallied against IMF-recommended cuts inpublic-sector wages. As a result, deficit-reduction plans will not be articulated until after the 2010 elections. As well as political hurdles to cutting spending, emerging economies face problems raising external finance, with massive sovereign-debt issues from the G7 ‘crowding out’ small economies from international bond markets. For many emerging markets, debt servicing will prove increasingly difficult, but cutting spending poses the alternative risk of stoking social unrest and degrading public services, both of which would worsen the operatingenvironment for business.

Reversing a multi-year trend of debt reduction, several low-income countries in sub-SaharanAfrica are at increased risk of debt distress in the short term. Many will require expanded supportfrom the IMF and development banks, and some further debt relief. While large emerging marketssuch as China, Saudi Arabia and South Africa spent around 50% of crisis funding on long-terminfrastructure investment, poor developing countries tend to devote resources to immediateneeds – wages, subsidies, tax cuts and cash transfers. This reflects both limited capacity tomanage large public investments and prioritisation of social safety nets as a hedge againstextreme poverty, food insecurity and unrest. A weak recovery is a particular problem for commodityexporters and other single-sector economies, which went rapidly from significant surplus tosevere deficit with the collapse in tourism and oil and metals prices. As a result, many low-incomecountries – or those with high poverty rates – will face problems with fiscal and political stability.

While the market for credit default swaps (CDS) halved during the financial crisis to $30 trillion,the world’s largest derivatives clearing house, Depository Trust and Clearing Corporation (DTCC),still records around $1.5 trillion in outstanding insurance against government default. Even a minordebt crisis could force payment on a portion of these contracts, undermining the apparently‘healthy’ firms that underwrite them and prompting another round of government interventionand borrowing: a sovereign default in even a small economy could easily transmit instability tothe heart of global finance.

PAGE 7RISKMAP 2010

G7 fiscal balances

Source: IMF

Jobs and bread

Unemployment exploded during the recession. The OECD reported 15m lost jobs between late2007 and mid-2009, nearly half in the US. Emerging markets also suffered: employment growth in China fell by 60% from 2007-08, while unemployment leapt more than 80% in Russia, 50% inTurkey and 20% in Ukraine. Significant age and gender gaps in unemployment also emerged, withmen disproportionately affected by declining construction activity and women hit by falling textileexports. Even with a strong recovery, it could take more than three years before the employmentgap returns to its pre-crisis trend, according to the International Labour Organisation (ILO).

A weak recovery will clearly not create enough jobs to absorb all those looking for work. Manycompanies were forced to consolidate, close or relocate. Manufacturing and export-orientatedindustries were hit especially hard as global trade collapsed. Indeed, many workers in developingand emerging countries were forced back into informal, unwaged labour. Furthermore, structuralchanges in consumption are underway in the US and Europe: savings rates jumped dramatically as households pared back spending and focused on paying off debt, suggesting a hangover forexport-dependent economies. Construction bubbles fuelled by easy credit have burst from Spain toDubai, depressing demand for steel, cement and other basic goods. Put starkly, many jobs will notcome back in the wake of the recession, and the private sector will be unable to drive job creationin a weak recovery. Unemployment is set to rise further in 2010, and could remain high for severalyears as economies recalibrate.

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PAGE 8 RISKMAP 2010

Unemployment increases by region, 2007-09

Source: ILO

With governments under intense fiscal pressure, the politics of public spending have become largelyabout employment. Worldwide, public spending funded a range of job-creation and job-protectionprogrammes. Many will continue to pay dividends in 2010, especially multi-year infrastructure projects,small-business subsidies, job training and direct public-sector employment. Others, such asunemployment benefits and tax rebates, have a shorter lifespan; without more funding, theseprogrammes will begin to expire in late 2009-early 2010. Combined with rising unemployment,funding shortages or the expiry of some employment and welfare programmes could create risksfor business.

The crisis provided a taste of these: in the most extreme examples, managers were held ‘hostage’by workers slated for redundancy, while employees protested over the shuttering of factories.Companies had to invest in executive protection and business continuity planning to safely winddown unprofitable investments. In certain instances, host governments pressured companies tokeep operating, freeze lay-offs and help to bail out state-owned partners. Similar security andoperational issues could emerge as unemployment lags behind the recovery. In particular, organisedlabour movements could increasingly exert influence over the political process, while anti-immigrantor anti-migrant sentiment – already raw in many places – could intensify amid competition forscarce employment.

A second area of concern for business will be state intervention in the labour market and its impacton social and political stability. On one hand, governments are likely to face strikes and demonstrationsfrom public-sector employees as they defer wage increases. On the other, showdowns overcutbacks at state-owned enterprises could drag private investors into domestic politics. This is thecase both where governments pressure foreign investors to support inefficient operations, as withRussia’s AvtoVAZ carmaker, and where governments-as-shareholders dictate operational parameters,as in the US or British banking sectors. Nonetheless, opportunities are likely to emerge fromgovernment intervention: developed countries will eventually look to extricate themselves frommanaging private companies, while privatisation may end the fiscal burden of supporting state-owned enterprises.

Finally, unemployment and other livelihood issues will continue to present security and operationalrisks in 2010. For developing countries, the unemployment shock has sharply reduced remittanceflows and forced more workers to rely on low-paid jobs in the informal economy. According to theWorld Bank and UN, the recession drove around 100m people worldwide below the $2/day poverty

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PAGE 9RISKMAP 2010

threshold, making a similar number food insecure. Ominously, food prices remain well above long-termaverages and oil prices could rise further in 2010 as the recovery takes off, implying greater socialvulnerability. However, the increase in global spare capacity, especially through new supply addi-tions in Saudi Arabia, and accumulation of stocks should cushion against price spikes in 2010. As inthe past, rising commodity prices and diminished welfare will put extractive companies under thespotlight, both by international NGOs and local communities. Petty crime, worksite theft and opera-tional disruption could increase during the recovery, requiring solid security management and sus-tained and direct engagement between companies and local stakeholders.

Oil supply, demand and spare capacity, 2004-10

Source: US EIA

Protectionism

Global trade collapsed in 2009 in the greatest contraction since the Second World War. Export-orientatedemerging economies – encompassing much of Asia – were hit particularly hard, seeing 25%-40%year-on-year declines in export volumes. So too were countries that depend on global supplychains, such as Egypt (Suez tolls) and Singapore (container trans-shipment). Despite early signsof a recovery by mid-2009, countries will find it difficult to export their way out of the recession.Credit conditions – though improved in 2009 – are worse than before the crisis and internationaltraders remain risk averse, often demanding cash in advance and higher margins. Moreover,there are concerns that rising unemployment could generate irresistible pressures for protectionism.

So far, fear has greatly outstripped reality. One broad reason for restraint is that the WTO provideda stable, durable framework for trade liberalisation. Nearly every major trading economy is boundby the organisation and – crucially – its method of resolving trade disputes is supported and usedby key emerging markets such as China and Brazil. The G20 agreed in November 2008 to refrainfrom protectionism and reiterated this commitment throughout 2009. The group also lubricated theglobal economy with more than $250bn of trade finance to overcome adverse credit conditions.Both measures showed that general commitment to free trade is increasingly entrenched at thehighest levels of global policy-making.

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OECD commercial stock growth (% change year on year) OPEC surplus capacity (% global supply)

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PAGE 10 RISKMAP 2010

However, the consensus on free trade depends on the speed and strength of the recovery. Protectionismis clearly creeping into trade policy worldwide. The trade monitor Global Trade Alert found nearly200 policies implemented since late 2008 that favoured domestic companies over foreign investors– almost two-thirds in the G20 – and uncovered others in the pipeline. Indeed, G20 members oftenhit each other with discriminatory trade policies, with China, the US, Japan and the EU being mosttargeted. Protectionist manoeuvres are more subtle than in the past: instead of simply hiking importtariffs, countries launch anti-dumping investigations against trade partners, provide export subsidiesto domestic firms, put local content requirements on stimulus spending, and raise bureaucraticobstacles to trade licences. As the WTO notes, narrow-minded protectionism risks undermining thebroad agenda to rebuild and rebalance global demand, which is central to recovery prospects.

Unsurprisingly, many trade actions cater to specific domestic constituencies: exporters in China, steelworkers in the US, farmers in India and so on. The crisis and recession provided a perfect opportunityfor powerful interests to push for protection. As the recovery unfolds – and stimulus spending runs out –further protectionism could be viewed as increasingly cost-effective and politically expedient. Althoughmajor trading countries will strive to avoid a debilitating trade war, tensions could fracture the co-operationthat characterised the response to the crisis and undermine the global policy agenda. On climatechange, for example, the US and European countries are strongly considering a form of carbon tax onimports from emerging and developing countries. Similarly, should ‘temporary’ crisis protectionism becomemore entrenched, it could change the playing field for the Doha development round of WTO negotiations.

Lingering external risks

As the weakness of 2008’s Indian monsoon season and the ensuing famine threat demonstrate,climate change is starting to have a real and significant impact on government finances and economicgrowth. Developing countries, in particular, are more vulnerable to climate change. According to theWorld Bank, climate change mitigation and adaptation costs for developing countries could reach$500bn or more annually over the next 20 years. Wealthy countries are expected to chip in, butfunding commitments to date are less than 5% of projected needs. There will also be costs to theprivate sector: financial liabilities associated with carbon output, higher project costs to cope withmore extreme weather and sea levels, and operational impacts stemming from water scarcity,social unrest and migration. Natural disasters – especially droughts and floods – can also derailrecovery prospects, especially at the local level. Typhoons that hit the Philippines in mid-to-late2009 caused significant property, infrastructure and crop damage, forcing the government tounexpectedly increase rice imports and leaving small businesses to absorb huge losses.

A major security incident – geopolitical or local – could similarly inhibit the recovery. As we note elsewhere,terrorism is becoming more localised, and building on insurgencies and other conflict dynamics. Justwhen countries are most in need of foreign investment, a major security incident such as a terroristattack could undermine the investment climate. Simultaneously, the potential remains for a majorgeopolitical threat to materialise. The most visible candidate is a military confrontation with Iran, whichwould have profound impacts on global oil markets, regional stability and investment in the Middle East.

Financial regulation

One major outcome of government intervention is serious efforts to reform global finance. Ahandful of economic zones dominate this arena: the US, UK and eurozone currently accountfor more than two-thirds of international capital flows. Add in China and Japan, and theso-called ‘systemic five’ represents around 80% of global money supply. Nonetheless,reform affects everyone, from tax havens in the Caribbean and Europe to new financialcentres and bank subsidiaries in the Middle East and Asia. Geo-politicisation of the issuewas inevitable: the US browbeat Switzerland with a threat of sanctions to force revisionsto its tax laws, while the UK and US fought France and Germany over banking bonusesand systemic risk surveillance. China, India and other G20 emerging markets hinged theirsupport for financial reform on greater say in global governance institutions, particularly the IMFand World Bank. Emerging markets and developing countries, however, may yet decide thatthe safest course of action is to focus on domestic finance and reduce exposure to foreigncapital. Even with broad consensus on the need for reform, disputes indicate that theco-operation that characterised the initial response will fray as national interests take over.

PAGE 11RISKMAP 2010

Key issues for investors

Advanced, emerging and developing countries will recover in different ways and at different rates.Flexibility is essential: companies that have conditioned their operations with ethics and compliancebest practice will find it easier to navigate a tightening regulatory environment. Companies thatembed security risk management at every stage of planning and implementation should proveresilient in the face of familiar or novel threats. Companies that recognise the reputational, financialand operational benefits of social and environmental accountability can thrive in a businessenvironment recalibrated by climate change. If history is any guide, recovery is a long-termprocess during which business-as-usual is re-evaluated. Those companies out in front in identifyingand responding to changes in the risk environment will be best positioned to seize opportunitiesin the budding economic order.

Businesses can manage each of the risks posed by the recovery process. As new legislation isenacted and existing regulations tightened, financial companies are likely to face new disclosureand compliance requirements, greater public scrutiny and possibly higher transaction costs.Increased emphasis on regulatory compliance will reward those companies with comprehensiverisk management and disclosure structures already in place. Companies should also not losetrack of corporate social responsibility trends, especially increased prosecution of fraud andcorruption, emphasis on stakeholder engagement and scrutiny of environmental impact.

In addition, companies must account for the progress of pre-crisis reforms in countries where they operate,and whether or not these have been derailed by the recession. In some cases, regulations or legislationthat might improve the business climate have stalled in the face of more pressing policies or politicalreconfiguration. In others, countries will court much-needed investment with more business-friendly policies.Finally, many aspects of country risk will not be dramatically affected by the crisis and recession.Underlying political, security, social and environmental issues will persist, and could even intensify duringthe recovery.

Jonathan Wood, Global Issues Analyst


In June 2009, after more than 42 years as president of oil-rich Gabon, Omar Bongo died in aSpanish clinic. Rumours, denials and confusion surrounded his illness and death, and similaruncertainty clouded his country’s future after many years of stability. Investors and observersfeared the worst: the collapse of Bongo’s carefully balanced coalition of elites; the eruption oflong-suppressed resentment over mismanaged oil wealth; or even civil war and military intervention.But despite violent protests, Bongo’s son Ali Ben secured power in presidential elections inAugust and in October appointed a cabinet with many familiar faces from his father’s regime.

The case raises wider questions about leadership transitions in authoritarian regimes – particularlywhere power is concentrated in the hands of long-standing and ageing rulers, and where thebusiness environment is highly personalised and politicised. Successions in such states have realsignificance for investors. They bring a possibility of social unrest, political crisis, contractual andregulatory uncertainty, a sudden loss of influence and being dragged into inter-elite posturing. Here,we look at the different ways that looming successions will play out in 14 countries, their potentialimplications for business and possible measures to mitigate the risks, focusing on the impact offactors such as potential for popular mobilisation, the ruling elite’s level of coherence and involvementin business, preparations for a smooth succession and the influence of external powers.

Through a glass, darkly

While the workings of such regimes tend to be opaque, the lack of visibility thickens when itcomes to succession. Uncertainty shrouds not only the identity of possible successors, but eventhe institutional framework governing the transition. Only in Egypt and Burma are the identity ofthe successor and the manner in which they will take power almost certain. In general, there arethree reasons for this:

• No precedent: Many of the incumbents arrived in power years ago. Eisenhower was in theWhite House when Fidel Castro seized office, Jimmy Carter when Eduardo José dos Santosassumed the presidency in Angola. Having taken power through military or palace coups, theyfounded their own regime and abrogated the previous order. With leaders in no hurry to leaveoffice, no predictable framework for succession has evolved, let alone a constitutional formula witha realistic chance of being respected.

• No rules: The political context has often changed enormously since the incumbent took office.Abdelaziz Bouteflika won Algeria’s presidency with military backing during a civil war againstIslamist insurgents. Islam Karimov was appointed president of Uzbekistan by the CommunistParty of the Soviet Union in 1990, maintaining power through a questionable election afterdeclaring independence in 1991. The format of the next succession will be very different.

• No obvious successors: In a number of countries – Angola, Cameroon, Cuba, Libya andTunisia being good examples – rulers have removed any potential challengers, deterring other possible candidates from too obviously throwing their hats into the ring.

The uncertainty raises the possibility that the sudden death of a dominant ruler will allow long-subduedrivalries to erupt into power struggles. Counter-intuitively, however, it may work in favour of theestablishment. Rulers often maintain suspense to prevent the emergence of organised opposition to an heir apparent or support for an alternative. The constitutional time span between the leader’sdeparture and the installation of his successor – for example through elections that can be easilymanipulated – in most cases is no more than a few weeks, impeding the ability of opposition forcesto mobilise support (as in Gabon). Even where rifts in the ruling elite emerge during the successionprocess, key groups will often form alliances to support a common candidate, thereby safeguardingtheir interests.

Leadership transitions: Family fortunes

PAGE 13RISKMAP 2010

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Potential tinderboxes: Algeria, Cameroon, Iran, Yemen, Zimbabwe

Leadership transitions in these five countries are likely to spark off, or provide a focal point for,power struggles that go beyond the elite and bring broader popular mobilisation. All share trackrecords of mass mobilisation and anti-regime agitation, as well as deep rifts within the politicalelite, though degrees of stability vary significantly. In Algeria and Cameroon, tightly controlled politicscontinue to suppress social tensions. In contrast, the transition is already under way in Iran andZimbabwe, and elite groups are engaged in open power struggles. In the latter, the installation ofa transition government under external pressure has been part and parcel of a protractedsuccession process as President Robert Mugabe’s grip on power is slowly prised loose. InYemen, the state is in an advanced process of disintegration, and the transition will provide afocal point for vigorous fissiparous tendencies.

In all these countries, the power struggles will be about more than Machiavellian ambition: theywill be about the nature of the state. In Algeria, Iran and Zimbabwe, this involves fundamentalquestions about the ideological basis of state power, the role of the security establishment andthe extent of democratic participation in politics. In Cameroon and Yemen, it is about the balanceof power between the state and tribal, ethnic or regional elites; the issues at stake range from theinfluence of ethnic communities over the central government in Cameroon, to the possibility ofsouthern secession and the outright defiance of state power in Yemen’s restive northern provinces.

Up in flames?

In Algeria, Iran and Zimbabwe, we anticipate protracted power struggles between the main elitegroups and political forces. These are likely to result in a prolonged period of unstable governmentsor a weakening of decision-making authority. In all three, these struggles have the potential totrigger sustained, widespread protests. Broader popular mobilisation is also likely in Cameroon,which, like Algeria and Iran, has a legacy of turbulent street politics.

Cameroon and, particularly, Yemen have the greatest potential for such unrest to turn violent. In both, succession struggles will be defined in tribal, ethnic or regional terms, and will take place in a context where small arms are widespread. In a worst-case scenario for Yemen, violentunrest could lead to an attempted southern secession and permanent loss of control over somenorthern provinces.

The role of the military and security establishments will be crucial. Violent unrest will force themto take an active – even heavy-handed – role in power struggles, and may even trigger openintervention to save the status quo. But neither the incumbents nor their favoured successors canafford to take the loyalty of the security apparatus for granted. This is particularly true if successorsattract widespread popular opposition, or if their imposition would threaten the republican order,as could be the case with Bouteflika’s brother Said in Algeria and Ayatollah Ali Khamenei’s sonMojtaba in Iran.

Not business as usual

The consequences for businesses operating in these countries extend far beyond the practicalimpact of prolonged unrest on security and operational continuity. Struggles over the nature ofthe state have the greatest potential to result in wholesale revision of the regulatory and fiscalframework for foreign investment. Weakened government authority and volatile policy-makingwould erode investor confidence and contractual security.

In their extreme form, power struggles can provoke the profound and drawn-out institutionalparalysis seen in Zimbabwe, leaving investors mired in uncertainty and giving free rein to thepredatory behaviour of corrupt officials. The tug-of-war between reformist and hardline forces inIran and Zimbabwe has direct consequences for foreign relations and openness to foreigninvestment. A hardline victory in Iran would increase the likelihood of persistent and additionalsanctions, while in Zimbabwe it would imply the continuation of predatory practices that havedeterred investors.

PAGE 15RISKMAP 2010

Meanwhile, a military coup is generally pretty much a guarantee of international isolation, andbrings with it a high risk of contract cancellations or renegotiations, as investors in Guinea haverecently experienced. Regionalist movements – most likely in Yemen – could contest investors’rights, or hamper their ability to operate in certain areas. Repression or military coups can alsoincrease companies’ exposure to potential reputational damage.

Elite power struggles: Angola, Equatorial Guinea, Libya, Tunisia, Uzbekistan

Where the ruling elite is relatively cohesive and threats to the regime from popular mobilisation orforeign power are insignificant or kept in check, successions are less likely to unleash widespreador protracted unrest. However, this does not preclude fierce elite competition to influence the outcome.

Succession struggles in check

In countries where long-ruling incumbents preside over growing political and economic inequalities,succession can be a trigger for latent discontent to pour out on to the streets. But as theGabonese succession highlights, unfocused anger can quickly burn itself out without organisedchannels for expression (such as coherent opposition parties, civil-society movements or churches).In each of these countries, such popular organisations do not exist – or have been forbidden –independently of the state. Moreover, elite pretenders to the throne have few incentives to exploitpopular discontent in support of their claims, perhaps aware that this could undermine theircollective ability to monopolise access to state resources.

It is no coincidence that three of these countries – Angola, Equatorial Guinea and Libya – arepetro-states, where oil rents dominate government revenues: there is no need to cultivate popularlegitimacy. A similar case could be made for extractives-dominated Uzbekistan. While Tunisiamay appear an exception, given its more diversified economic base, closer inspection revealsextensive elite penetration of the private sector, particularly in areas dependent on the centralallocation of operating licences.

Papering over the cracks

Nonetheless, authoritarian ruling elites – however small – are rarely homogenous. They mayunite in the face of external threats, but in the absence of such threats internal splits develop,based on the way in which the elites were formed. There are examples in each of these regimes:the contested status of uncles and sons in Equatorial Guinea’s clan-based system; rivalriesbetween in-laws in Tunisia’s wider ruling family; conflicts among Angola’s old creole families andwith the younger black Angolan elite; splits between sons of very different temperament in Libya;and regional clan rivalries in Uzbekistan.

The presidents of these regimes are past-masters at effectively managing these divisions, carefullybalancing different groups to prevent any one from becoming too powerful. The ruler’s exitinevitably raises the spectre that tensions will burst into the open. The continuing successionprocess in Gabon attests to this, with the grand ethno-regional coalition so carefully constructedby Omar Bongo the first casualty of his departure.

Existing battle lines can be redrawn when the succession struggle commences, usually on thebasis of reassessments of the relative strength of potential rivals. Prior to Bongo’s death, themost significant internal conflict pitted his son Ali against his daughter Pascaline – the heads ofthe two most influential ruling-party factions. Early assessments that this conflict would define thesuccession proved fanciful when Pascaline threw her weight behind Ali’s bid, presumably consciousof the need to protect family interests against the threat from rival elites drawn from strongerethno-regional groups. This sheds similar doubt on the rivalry in Libya between Saif al-Islam andMuatasim al-Gadhafi in the event of their father’s sudden death in office. On the other hand, thebloody family history of Equatorial Guinea’s ruling clan – Obiang overthrew and executed hisuncle – shows that blood ties need not be a deterrent to conflict.


Business in the firing line

While such high-level struggles present a less immediately apparent threat than broader social andpolitical conflict, inter-elite competition over successions can prove highly destabilising for foreigninvestors – particularly where previous elite consensus has been founded on mutual businessinterests. Conflicts triggered by the succession process may well play out in the commercial as wellas the political arena. Many businesses have to associate themselves with influential individualsor factions to succeed under such regimes. As a result, even a minor shift in the centre of gravityamong elite factions can affect access to the political protection essential to operating in such countries.Having an operating licence or investment linked to the wrong side of the elite can provoke difficultiesranging from malicious tax investigations to wholesale expropriation.

Continuity and change: Egypt and Burma versus Cuba and North Korea

For every rule, there is of course an exception. In Egypt and Burma, the succession has beenpre-determined to such an extent that its derailment is highly unlikely. In that notorious bastion ofsecrecy North Korea, the lack of preparation and level of opacity surrounding the succession issuch that uncertainty is total. The looming Cuban succession lies somewhere in between: changeis certain, but the chances of a stable transition are good.

Control freaks

In both Egypt and Burma, rulers have enthusiastically set about protecting their legacy. Elaborateconstitutional frameworks have been established to predetermine the course of events. To preventthe emergence of organised opposition to the chosen heir, political adversaries have been sidelined,allies placed in key positions and the political landscape tightly controlled. And in both countries,the regime has deliberately avoided relying on an ideological basis for state legitimacy, realisingthat the arrival of a new generation of leadership could expose its obsolescence.

As a result, the smooth transition in Burma from Gen Than Shwe to Gen Thura Shwe Mann (mostlikely following Than Shwe’s rebranding as a civilian president) is all but certain. Similarly, the transitionfrom Hosni Mubarak to his son Gamal in Egypt will take place in formally competitive but actually tightlycontrolled elections. This also means continuity and further development for the extensive businessinterests of oligarchs allied with Gamal and cronies associated with Burma’s Tatmadaw military junta.

However, elite-managed successions have the potential for the most divergent implications forbusiness. They may offer outward continuity, but they are the only scenario in which the successionprocess leaves inherent contradictions of authoritarian and highly personalised regimes largelyunresolved. There are few guarantees that the successor will possess the necessary acumen tohold the regime together, increasing the likelihood of more fundamental change at a later date.

Keeping it in the family

The case of North Korea illustrates the crucial role of sufficient preparation for a controlledsuccession. The 26-year-old Kim Jong-un only emerged in 2009 as Kim Jong-il’s heir apparent – adevelopment very probably brought forward because of the deterioration in his father’s health.Moreover, just months after succession planning became apparent, propaganda efforts to glorifyKim Jong-un within official circles appeared to be suddenly halted, raising further questions aboutthe situation in Pyongyang.

While his father had more than 20 years to prepare for leadership, Kim Jong-un could find himself inthis situation at a moment’s notice. In a regime of old men with decades of shared military andleadership experience, and a society that places great emphasis on age and seniority, Kim Jong-un’stakeover in the current situation could trigger fierce power struggles within the regime, and increasethe chances of its gradual erosion and eventual demise. By contrast, with sufficient leeway toprepare the ground for Kim Jong-un’s takeover, the regime could yet prove surprisingly resilient.This is one of the lessons to be learned from the Syrian case, where Bashar al-Asad – who onlyemerged as heir apparent after his brother Basil’s death in a car crash in 1994 – would probablyhave failed in his bid for the presidency had his father Hafez died in 1995, rather than in 2000,after key rivals had been sidelined and Bashar’s allies promoted into key positions.

North Korea’s international isolation, ailing economy and obsolete ideology are also features ofpre-succession Cuba, though there they are much less pronounced. The lack of visibility in Cubais even greater than in North Korea, as the younger generation of party cadres and officers arestill eclipsed by the Castros and their ageing military comrades. But while the North Koreanregime would be unlikely to survive even a cautious opening up of society and the economy, theCuban state’s institutional and ideological foundations are strong enough for a transition to a stablecivil-military regime with a more liberal approach to economic management and foreign investmentto be conceivable.

In both cases, however, the influence of foreign powers will be crucial for the ability of successorsto cement their power. The lifting of US sanctions would provide the Castros’ successor with asignificant economic boost, while Kim Jong-Il’s successor will be heavily dependent on China’seconomic and diplomatic support to assert his power.

Moving towards mitigation

Confronted with the uncertainties of an unfolding succession, companies tend to adopt a reactiveapproach, dealing directly with the most immediate risks – typically security considerations – andwaiting for the dust to settle before addressing any political concerns. But where leadershiptransitions are likely to have direct ramifications for business, as in the cases discussed here,mitigation strategies should be built into a project at its outset, and implemented throughout itsduration. Such a preventative approach includes a diversified government relations strategy thatavoids overly heavy reliance on individual power-brokers and steers clear of intra-elite cleavages.Clear anti-corruption policies are also crucial to reduce the risk of punitive actions framed asanti-corruption measures by the successor (whether justified or not). Buy-in from local communities,built through good community relations strategies, also helps to reduce the potential impact ofsuccession or regime change. Finally, advance succession scenario planning is equally vital. Itmay not be possible to identify with certainty how a succession process will affect a project’ssecurity of tenure, but scenario planning will at least identify major potential risks and highlightareas of greatest vulnerability.

As succession draws nearer, rapid adaptation is often required as companies seek to assess thecontours of the new political landscape and scramble to identify new project champions. Strongintelligence-driven analysis is a crucial component of this exercise, but by no means a solution.Where the fortunes of potential candidates for succession are subject to sudden boosts andreversals, close and constant analysis of dynamics within the elite can provide crucial pointers –but in most cases, investors are well-advised to hedge their bets and avoid siding overtly with theperceived frontrunner. Much the same applies to companies’ adaptation to the successor government:a thorough and constantly updated understanding of developments within the regime – includingthe ups and downs of individual players, possible shifts in policies towards investment, and theinfluence of foreign powers over the new government – is a crucial basis for a communicationstrategy that minimises the negative fallout from the succession, and maximises its benefits.

Christopher Melville, Senior Africa AnalystWolfram Lacher, Senior North Africa Analyst

PAGE 17RISKMAP 2010


Patterns of Islamist extremist activity are changing. The threat presented by the global jihadist (armedstruggle) movement has shifted since September 2001 and will further evolve in 2010 and beyond.Recruitment, organisational and financing patterns have shifted amid a wider strategic contextcharacterised by fluid and possibly diminishing terrorist sanctuaries. Reconfigured networks arearising as al-Qaida leadership’s command and control are disrupted or loosen. This, in turn, is affectingterrorist capacity to plan, fund and conduct operations, with a resulting impact on the selection of targets.

Counter-terrorism measures are being recalibrated to adapt to this reality, with, for example, agreater emphasis on domestic preventative measures as more attacks are perpetrated by‘home-grown’ terrorists. Business also needs to understand these trends if it is to mitigate riskand apply effective prevention techniques. Here, we chart what is happening on the so-called‘new frontiers of jihad’. By understanding the changing threat landscape, companies can moreeffectively assemble and apply tools and techniques for sound security risk management.

What is al-Qaida now?

Setting aside the threat posed by the myriad of purely regional terrorist groups, whose motivationsderive from very specific ethnic, territorial and religious grievances, our focus is on the global jihadistmovement either supported or inspired by al-Qaida. What al-Qaida currently is continues to be thesubject of intense debate among policy-makers and academics. The most persuasive explanation isthat the hierarchical structure that operated in Sudan and then Afghanistan in the 1990s has beenreplaced by a more fluid and amorphous model. This puts the al-Qaida central leadership (‘al-QaidaCentral’), currently sitting in the border regions of Afghanistan and Pakistan, at the core of threeconcentric circles. The middle layer consists of a network of activists with growing autonomy, whilea loose and somewhat nebulous social movement of sympathisers lies along the outer edge.

The decline in al-Qaida Central’s ability to fund and direct operations – laid bare in October 2009by credible reports of a severe cash shortage – and the serious erosion of popular support at theouter edge in the wider Muslim community have required the middle circle of networked activiststo be increasingly self-recruited, self-directed and self-financed. Despite this fragmentation, jihadinetworks linked to or inspired by al-Qaida are still sustained by a broadly common aim andprogramme. This centres on the liberation of Palestine, the removal of Western influence – bothhard security power and ‘soft’ cultural power – from Muslim lands, the creation of a pan-Islamiccaliphate and the imposition of Sharia (Islamic law) as widely as possible.

Abu Musab al-Suri, one of al-Qaida’s leading strategists, states that al-Qaida is effectively a systemwhose philosophical foundation is relatively constant, deriving from a confluence of Salafist andWahhabist thinking, and activated by violent struggle. While this is true, the global jihadi vision isbeing increasingly coloured and moulded by more specific grievances as al-Qaida Central’s gripover local networks and cells weakens. Not all of these local influences are entirely in keeping with‘classical’ al-Qaida strategy, as demonstrated by Abu Musab al-Zarqawi’s al-Qaida in Iraq (Tawhidwal-Jihad) and al-Qaida in the Islamic Maghreb (QIM – formerly the Salafi Group for Preachingand Combat (GSPC)) in Algeria.

Al-Qaida under pressure

Since the truce agreed in 2004 between former Pakistani president Pervez Musharraf and tribal leadersin the Federally Administered Tribal Areas (FATA), al-Qaida Central has operated out of the borderregion of Pakistan and Afghanistan. However, this sanctuary began to be threatened in 2009 whenthe Pakistani army began an operation to clear the Swat Valley in North-West Frontier Province(NWFP) of the Islamist militant Tehreek-e-Nafaz-e-Shariat-e-Mohammadi (TNSM). The operationwas, at best, only partially successful (TNSM leaders are still at large and insurgent attacks continuein NWFP), but a further offensive was launched in mid-October 2009 to root out al-Qaida, PakistaniTaleban (Tehrik-e-Taleban – TTP) and other assorted militants in FATA. The long-term success of thisoperation cannot be taken for granted: public support is brittle and elements of the Pakistani securityestablishment are reluctant to forego a useful ‘ungoverned space’ from which it can project informalinfluence in a deniable form into Afghanistan, while using it as a base for insurgents operating inKashmir.

Mapping the new terrain of global Islamist terrorism

PAGE 19RISKMAP 2010

Whatever the ultimate fate of the FATA offensive, al-Qaida Central will find itself under pressureboth from the Pakistani military and, possibly, from its FATA tribal hosts, who might consider itexpendable in any negotiations with the Pakistani leadership. Authoritative intelligence sourcessuggest that, in such an eventuality, al-Qaida Central is preparing to decamp to other ‘ungovernedspaces’ in northern Yemen and Somalia. These boltholes are likely to create new logistical andoperational difficulties. Al-Qaida has functioned most effectively when it has had a semi-officialsponsor with a local monopoly on violence – as in Sudan and later Afghanistan. But the securitysituation in both Yemen and Somalia is so unsettled that al-Qaida may find its activities disruptedby predatory local warlords or internecine clan strife. Aside from the risk of being mugged, localinfrastructure deficits will make the establishment of training camps and the creation of supply,communication and financing chains more problematic. In other words, Somalia and northernYemen may simply be too ‘failed’ for al-Qaida Central to operate successfully.

Outsourcing and localisation

The decline in permissive environments, allied to current cash shortages and falling support inthe wider Muslim world over recent years, has necessitated a change of tactics in the globaljihadist movement. Al-Qaida has increasingly channelled support to groups fighting against theso-called ‘near enemy’ – governments of Muslim states rather than the US or its allies. Tacticalalliances with Iraqi, Libyan, Algerian, Indonesian and Uzbek groups have had decidedly mixedsuccess. The threat posed to foreign businesses and individuals in these states is largely indirect:for example, the kidnapping of tourists and business personnel for ransom inside Mali, the bombingof soft targets in South-east Asia designed to destabilise governments, and the corrosive effecton state authority of terrorist involvement in organised criminal networks trafficking in narcotics orother illicit goods.

While public morale would inevitably be sapped should incidents such as the Jakarta bombings ofJuly 2009 recur frequently, Indonesian society has proven itself resilient in the face of violent extremism– as was India following the Mumbai attacks in 2008. Partly as a consequence, conflicts have arisenwithin local terrorist groups over the value of tactical alliances with al-Qaida. The benefits of short-termaccrual of funds and know-how are counter-balanced by local and international opprobrium, and thelikelihood of greater security pressure resulting from international counter-terrorism co-ordination onintelligence-sharing and asset-tracing designed to degrade al-Qaida-allied groups.

The second reconfiguration has been in the recruitment, organisational and financing patterns ofthose groups and individuals operating in Europe and North America. Research undertaken byControl Risks into the major terrorist incidents and plots in these regions since September 2001reveals several key trends that should be used to inform clients’ counter-terrorism planning.

1. Recruitment

As terrorism expert Peter R Neumann has pointed out, recruitment in the West is shifting frompoints of congregation, notably radical mosques and bookshops, which have either been closedor are now much better policed, to points of vulnerability, particularly prisons, detention facilitiesor welfare centres for immigrants and the socially disadvantaged. Radical imams, such as AbuHamza in the UK, Mohamed el-Maghribi in France and Abdul Jabbar van de Ven in theNetherlands, who acted as propagandists and spurious religious authorities to Muslim youthgroups in the mid-2000s, have either been prosecuted or subjected to more aggressive deportationpolicies. Their influence is waning.

There is also a steady decline in the number of jihadi recruits who have been through training campsin Afghanistan and Pakistan. Instead, senior cell recruiters such as Redoune al-Irsa (Hofstad Groupin the Netherlands), Mohamed Siddique Khan (7 July 2005 London bomber) and Qayyum AbdulJamal (Ottawa bomb plotter) have acted more as local entrepreneurs capitalising on the personalproblems of younger, impressionable and often socially marginalised individuals. As the bindingagents of the cell, group leaders provide lifestyle discipline, and an explanation and focus for angerand resentment. As a consequence, the average age (now a mere 20), social class and levels ofeducational attainment of new jihadi follower-recruits are rapidly falling, and with them the technicalcapacity to conduct sophisticated operations. The graph overleaf illustrates the falling age profile ofjihadi recruits at the time of their arrest for plots and attacks in the West since 2001.


Average age at time of arrest of jihadi plotters prosecuted in Europe, North America and Australia,2001-09

Source: Control Risks. Data set 171 individuals

At the same time, the internet is assuming greater importance as a gateway into activism forhome-grown terrorists. Although evidence collected from convicted terrorists suggests that jihadiwebsites reinforce existing extremist opinions rather than act as radicalising instruments in theirown right, the emergence of dedicated chat-rooms can often normalise extreme views, flatten outhierarchies through the anonymity of postings, and, as the cases of the Glostrop network inDenmark and Irfan Raja in the UK illustrate, serve as a transnational connecting point for terroristcells. It is noteworthy that whereas the Los Angeles millennium plot (2000), the Singapore plot(2001), and the Istanbul (2003) and Madrid (2004) bombings were all principally the result offace-to-face interactions, the later Toronto (2006), German train bomb (2006) and Glasgow/LondonWest End (2007) plots were largely driven by online connections.

2. Group organisation

The newly formed groups are characterised by their close-knit dynamics, and their increasingseparation from the rest of the Muslim community, including local mosques, which are now perceivedby cell leaders to be moderating rather than radicalising influences. This suggests that morerather than less religious education might help to prevent future attacks. Many cells also reflect afall-back to existing local and kinship networks. More than 80% of the new wave (post-2003) ofjihadi plotters in the West either became active in a country where they were not raised, or werefirst- or second-generation immigrants, usually brought together by social networks from theircountry of origin. Half of the terrorist suspects detained in France since September 2001 originatedin or near Oran in Algeria. The Hofstad group came from al-Hociema in Morocco and theMontreal plotters from Algiers, while a significant proportion of convicted British jihadists arelinked by family ties to the Mirpur region of Pakistan. Importantly, these groups are bringing withthem not only the dislocation caused by immigration, but political grievances imported from theircountries of origin, both of which act as motivations for the turn to violence and provide potentialtransnational connections to technical expertise and training.

A significant development in 2008 and 2009, likely to persist in 2010 and beyond, is the growingnumber of young, self-starting ‘lone wolves’. The failed 2008 plots of Andrew Ibrahim (Bristol, UK)and Nicky Reilly (Exeter, UK), and the arrests in 2009 in the US of Michael Finton (Springfield,Illinois), Najibullah Zazi (Denver, Colorado) and Maher Hussein Smadi (Dallas, Texas) are

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examples of maladjusted individuals with little formal terrorist training, aiming to cause maximumcivilian casualties by attacking soft targets such as mass transit systems, hotels and shoppingcentres (malls).

An important dynamic both in these new cells and among the lone wolves is their lack of formalreligious instruction. Most, in fact, have had secular upbringings. For them, rudimentary versionsof Islam provide a comprehensible framework enabling disordered lives to be structured. However,without exposure to official religious authority, these can be easily distorted into violent interpretationsof militant Islam.

The obvious decline in sophistication and capacity accompanying these shifts is counter-balanced bymuch greater organisational resilience. Smaller, local and self-isolating home-grown networks areharder for intelligence agencies to penetrate, while self-radicalised ‘bedroom’ jihadists can be extremelydifficult to detect unless their public behaviour raises concern, as was the case with the Bristol plotter,Andrew Ibrahim.

Al-Qaida Central has facilitated rather than orchestrated this organisational transformation. If terrorismis propaganda by deed, the two are now becoming increasingly discrete, with al-Qaida Centralproviding the propaganda both before and after the event, while leaving autonomised cells totake care of the deed.

3. Financing

The decline of al-Qaida Central as a source of training, organisation and direction for transnationaljihadi networks is having an impact on the financing of terrorist operations. Regionally entrenchedterrorist movements such as the Revolutionary Armed Forces of Colombia (FARC), the TTP (Pakistan),Hamas (Palestinian Territories) and Hizbullah (Lebanon) have all traditionally had sophisticated andwidely varied transnational funding networks, ranging from drug-trafficking to relatively developedmineral extraction operations. Al-Qaida has in the past also profited from semi-licit business lines in,for example, real estate (Safa Group), construction (Hijra group) and food (Al Nur Honey and AlHamati Sweet Bakeries). Diaspora communities have been the life support of the Liberation Tigers ofTamil Eelam (LTTE) in Sri Lanka, and ‘deep pocket’ individual donors from the Gulf Arab states wereinstrumental in the growth of al-Qaida. Bogus charities such as the Global Relief Foundation, MercyInternational and the Koranic Literacy Institute channelled funds to al-Qaida and Hamas. In areascontrolled by terrorist groups, ‘revolutionary taxes’ are imposed on small businesses and, in areasof Afghanistan and South-east Asia, on opium-growers. Tactical alliances with organised crime groupsto smuggle narcotics, people and resources such as tanzanite, gemstones and oil have also beenimportant revenue streams.

The new wave of home-grown jihadists does not control territory, nor does it have direct accessto corporate or charity front entities. The exploitation of unregulated informal value transfer systems,such as hawala, a trust-based international monetary transfer system used widely in Asia andAfrica, has traditionally been an important source of terrorist funding, and is likely to remain sodespite the strengthening of counter-terrorism financing regimes. Regional counter-terrorismfinancing regimes, such as the Middle East and North African Financial Action Task Force andthe Asia-Pacific Group on Money-Laundering, have underpinned legislative initiatives at nationallevel enacted since the mid-2000s in core terrorist source and funding states. Nevertheless,problems of domestic enforcement, use of non-traditional and criminal financing methods, andthe sheer inexpensiveness of funding high-impact operations are all likely to remain difficult toresolve in the short-to-medium term.

Implications and mitigation

The continuing reconfiguration of jihadi recruitment, organisation and financing carries severalimplications for business. The first is that declining capability, alongside enhanced securityprocedures in place in embassies, government buildings, military facilities and airports, meansthat new jihadist cells will go after softer targets, preferably those with symbolic value. This is notnew. Shopping centres, nightclubs, hotels, transport infrastructure and sporting events have allbeen consistent targets since 2001. However, they increasingly represent the only viable Westerntargets, rather than simply being one option among several.


Secondly, home-grown terrorism is, by its nature, geographically constrained. With limited transnationalsponsorship or direction, plotters themselves, their planning and their targets are all less likely tocross jurisdictional boundaries. Improvements in border-management practice, such as iris-scanningand biometric passports, have also played a part, though they clearly add time costs to businessand cut against the grain of economic liberalisation that inspired the Schengen Agreement andthe North American Free Trade Agreement. Government resources are starting to be shifted towardshome-grown terrorism. The British government’s ‘Prevent’ strategy is an indicator of this strategicreorientation. While the firm direction provided to the Mumbai terrorists from Pakistan appears tocontradict this pattern, this attack was bound up more with local inter-state dynamics over theKashmir conflict and domestic ethno-communal relations than orthodox transnational jihadism.

The third implication is that, with the decline in funding and training from al-Qaida Central, andthe consequent lack of operational sophistication, terrorist attacks in Europe and North Americawill be conducted ever more cheaply. The Madrid and London bombings cost a combined total of$25,000, demonstrating that spectacular attacks need not be expensive affairs. Low-cost, high-impactoperations are virtually impossible to trace through anti-money-laundering mechanisms such asthe Financial Action Task Force on Money-Laundering. Unless detectable criminal fundraisingmethods – such as credit and ATM fraud, or petty trafficking in illicit goods or drugs – are used toraise cash, the money found for home-grown terrorist attacks can be exceptionally difficult totrace and interdict.

The final implication is more positive. The absence of formal training, experienced leadership orthe sort of resources that enabled an attack on the scale of September 2001, together with thedeclining age and quality of recruits, means that terrorist plots are more likely to fail. Apart fromthe failed operation at Glasgow airport in 2007, there have been no substantive terrorist attacksin Europe and North America since the London bombings in July 2005.

Cumulative total of jihadi terrorist plots versus attacks in Europe, North America and Australia,2001-09

Source: Control Risks

This is the result of a number of factors: improved intelligence-gathering and sharing, better urbansecurity design and increased vigilance, and the extension of ‘dataveillance’ and cutting-edgeface recognition technology at international airports. An expansion of CCTV networks with automatednumber plate recognition has built on lessons learned from previous terrorist campaigns, forexample the IRA bombings in the City of London in the early 1990s, which led to the creation ofthe ‘ring of steel’ security and surveillance cordon around the City and the subsequent revolutionin commercial building security.

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Of possibly greater importance from a preventative standpoint, however, has been the substantivebuy-in of Europe and North America’s Muslim community leaders to more nuanced counter-terrorismstrategies on the part of Western governments. This has led to increasing vigilance in the community,particularly of new converts, who form a disproportionately large percentage (though only 7% inoverall terms) of terrorist plotters in the West.

The evolving nature of terrorist threats will still require the security directors to revisit trusted situationalprevention techniques to increase the effort and risks involved in undertaking attacks against abusiness, while reducing the rewards and provocations. Terrorist attacks cannot be predicted orwholly designed out, but they can be anticipated. A key element will be recognition that perpetratorsare increasingly likely to deliver the mode of threat on their person, placing a premium on surveillanceand entry screening.

Lastly, the failure of recent plots has also been the result of defective planning and elementary mistakesmade by the terrorists themselves. This poor track record should not lead to complacency on thepart of security directors. The new wave of terrorists may be less smart, but they are also lesspredictable. As the Provisional IRA stated after the 1984 Brighton bomb failed to kill then Britishprime minister Margaret Thatcher: ‘Today we were unlucky, but we only have to be lucky once. Youhave to be lucky every time.’

Michael Denison, Research DirectorAdditional research by Mira Comara


International anti-corruption laws: are they really working? If so, how?

The US Foreign Corrupt Practices Act (FCPA) is now more than 30 years old, and the 1997 OECDAnti-Bribery Convention is well into its second decade. All the leading industrialised nations nowhave laws against bribery of foreign officials, and – if the growing number of conferences and seminarson anti-corruption compliance is an indicator – they appear to be having an impact. But what sortof impact? Will these laws make the task of international entrepreneurs easier? Or is the net resulta growth in bureaucracy that merely adds to the burdens on investors?

Here we look at how international anti-corruption laws will work in the year ahead and beyond.These laws have largely positive effects, but can deter good companies from operating in high-risk– and potentially profitable – markets. Against a background of tighter international enforcementin 2010, it is important for companies to follow the letter of the law. But to operate successfully inhigh-risk countries, they need strategies that go beyond the demands of narrow legal compliance.

Enforcement from the US…

For more than three decades the US has taken the lead in calling for stronger action againstcorruption. It has by far the strongest record of enforcing its own laws against foreign bribery,and this will continue into 2010 and beyond. In September 2009, senior Department of Justice(DoJ) official Mark Mendelsohn reported that his team was conducting as many as 120 criminalinvestigations into suspected FCPA violations. Both the DoJ and the Securities and ExchangeCommission (SEC), which shares responsibility for enforcing the act, can point to an upwardtrend in the number of FCPA cases compared with the early 2000s.

Total number of SEC FCPA enforcement actions, 2000-09

Source: SEC

Moreover, the net is widening. In recent years there has been a particular focus on the natural resources,infrastructure and pharmaceutical sectors. The latest cases include the conviction in August 2009 of formercongressman William Jefferson, who in 2005 was found to have hidden $90,000 in cash in his freezer,and had been accused of paying bribes to Nigerian officials. In September 2009, two Hollywood producerswere convicted for paying $1.8m to Thai officials to win the right to manage a Bangkok film festival.

The record fine for a US-based company is held by oil services company KBR, which in February2009 paid a total financial penalty of $579m as a result of bribes paid in Nigeria. Companies thatfall foul of the SEC and the DoJ frequently have to submit to the supervision of an external monitorto ensure that their compliance programmes come up to standard. The DoJ has also shown anincreased propensity to pursue individuals, as well as companies, and to send them to prison.There is no doubt that the FCPA has bite.

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…and the rest

US businesspeople still complain that the FCPA puts them at a competitive disadvantage againstrivals from countries where the law is less strictly enforced. Two factors will mitigate this in 2010.

First, the SEC and DoJ target lists will include a number of foreign companies. The FCPA grantsthe US jurisdiction over foreign companies listed in the US or that make use of US financial servicesin pursuit of corrupt activities, and the two agencies have been making full use of these provisions.The most notable recent case concerns Siemens, which in 2007-08 paid $1.6bn to the US andGerman authorities on account of foreign bribery offences, while fees to lawyers and accountantsrelated to the case amounted to a further $1bn.

Secondly, 38 countries have now introduced laws similar to the FCPA under the terms of the1997 OECD Anti-Bribery Convention, though the extent to which they publicise the laws andprosecute offenders will continue to vary wildly. The most remarkable change in recent yearscomes from Germany, which according to anti-corruption NGO Transparency International (TI)has accumulated 110 international corruption cases.

Foreign bribery cases in selected OECD countries to December 2008

Source: OECD Anti-Bribery Convention Progress Report 2009

One of the countries to watch in 2010 will be the UK. Nettled by accusations of cynicism andhypocrisy from their OECD counterparts, the authorities have diverted greater resources to theinvestigation of foreign bribery cases. In a landmark case in September 2009, a British courtsentenced engineering company Mabey & Johnson to a total penalty of £6.6m ($10.5m) oncharges of bribing foreign officials in six countries, as well as breaching UN sanctions in Iraq.The UK’s Bribery Bill will come into force in the course of 2010, and the Serious Fraud Office(SFO), which currently has a case list of around 15 companies, will take full advantage to launchfurther prosecutions.

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In Japan, too, there are signs of change. Tokyo has been criticised for its dilatory performance in following up the OECD convention. However, in early 2009 courts sentenced four PacificConsultants International (PCI) executives to suspended prison sentences and imposed a ¥70m($774,000) fine on the company for paying bribes to Vietnamese officials in return for constructioncontracts. This was the first foreign bribery case that had come to trial in Japan. The next mayalready be in the pipeline. However, there have been no recent foreign bribery prosecutions inmany other leading OECD states.

A major concern for many companies is the prospect of intensified competition from rivals basedin countries that have yet to sign the convention and have no laws against foreign bribery. TI’sBribe Payers Index ranks 22 leading exporting countries according to the frequency with whichtheir companies pay bribes. The four countries with the worst rankings in the most recent indexare India, Mexico (which unlike the other three is a signatory to the OECD convention), Chinaand Russia.

China’s expanding international role – especially in Africa – means that its companies have comeunder particular scrutiny. Prime Minister Wen Jiabao has called on Chinese companies operatingabroad to ‘forbid inappropriate deals and reject corruption and kickbacks’. However, in January2009 the World Bank debarred four Chinese construction companies from Bank-sponsored projectsafter they were accused of conspiring to rig tenders in the Philippines. In July 2009, a majorChinese company was caught up in a bribery investigation in Namibia. Next year, the Chinesegovernment will expand its current crackdown against bribery, but the main focus will be oncrimes committed within China rather than abroad.

Developing and transition economies: tackling the ‘demand side’?

The FCPA and its equivalents are intended to combat the ‘supply side’ of international corruption:prosecutions are always directed against companies and individuals that pay bribes, not theofficials who receive them. This raises the question of what host governments are doing toimprove the governance environment for foreign investors. Again, the picture is highly uneven,and the combination of good and not-so-good news will continue in 2010.

Since the late 1990s, the World Bank Institute (WBI) has published a set of six WorldwideGovernance Indicators, one of which is ‘control of corruption’ (see www.govindicators.org). Theseprovide a broad basis for comparison, both between different countries and over time. In a recentessay, Daniel Kaufmann, who helped to design the indicators, noted that there was no clearindication of a global trend towards higher standards of governance, but that it was possible todetect significant trends in individual countries, both for better and for worse.

The UK sharpens its act

The Bribery Bill amounts to a wholesale revision of the country’s anti-corruption legislation,parts of which date back to 1889. Key features include:

• A new corporate liability offence of ‘negligently failing to prevent bribery’.• Companies convicted of bribery face an unlimited fine. Individuals could face a prison

sentence of up to ten years and/or an unlimited fine.• The proposed law is stronger than the FCPA in that it covers private-to-private corruption

as well as bribery of foreign officials.• Unlike the FCPA, the law’s definition of corruption does not exclude small ‘facilitating

payments’ to speed up routine governmental actions such as customs clearances.

Clarifications to the law will make it easier for the British authorities to pursue bribery cases,both at home and internationally.

PAGE 27RISKMAP 2010

Changes in ‘control of corruption’ in selected countries, 1998-2009

Source: Kraay and Mastruzzi, Worldwide Governance Indicators. Control Risks’ selection.

A common theme in the countries with declining standards in our selection is the entrenched positionof political elites with an interest in resisting transparency. Gabon is rich in petroleum, but poor ingovernment transparency; the French chapter of TI brought a case against former president OmarBongo (who died in 2009) over alleged use of state funds to purchase property in France. In Russia,President Dmitry Medvedev has promised to tackle corruption, but with few short-term results, whileZimbabwe’s sharp decline is linked to the wider political crisis arising from President Robert Mugabe’sclinging to power.

On a more positive note, three countries that had previously rated particularly poorly show definitesigns of improvement. This can be attributed to political change: the departure of presidents Suhartoand Slobodan Milosevic from Indonesia and Serbia, and the reforms initiated since the 2003 ‘RoseRevolution’ in Georgia. However, all are still on the ‘poor governance’ side of the ranking. Continuedprogress depends on their ability to consolidate institutional reforms regardless of who is in power:this will be particularly difficult against the current background of political turbulence in Georgia.

Those countries that already had positive ratings have improved further, though it would be rashto discount the possibility of future reversals. Concerns have been raised in South Africa by thegovernment’s decision to disband the ‘Scorpions’, an effective but at times controversial anti-corruptioninvestigative team. Incoming President Jacob Zuma narrowly escaped corruption charges beforecoming to power, raising questions about the depth of his commitment to future enforcement.

While the lack of evidence of an overall global shift to higher standards of governance is disappointing, the indicators suggest grounds for hope. Corruption is a long-term problem, butgovernments that pursue the anti-bribery agenda can – over time – make real progress. The keyfactor is not wealth or even administrative capacity (though both are important), but political will.This depends on a range of other factors, such as the strength of local civil society and media.It is in every country’s interest to combat corruption, not least because this makes it easier toattract high-quality foreign investors and in the long term increase national prosperity. However,substantive anti-corruption campaigns are not necessarily in the personal interests of the nationalelites who decide policy, or of the mid-ranking bureaucrats who grant licences, administer customsclearances, and monitor real and imaginary traffic violations. Most governments are strong onanti-corruption rhetoric, and many have well-drafted laws, but effective implementation will remainall too rare.

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Get me a compliance programme!

The FCPA has a clear impact on US company behaviour in that almost all major US-basedinternational companies – and many smaller ones – now have compliance programmes of somekind. Increasingly, their counterparts in other OECD countries and further afield are following suit.Nevertheless, major challenges arise from the disconnect between the way the world should be –if all laws were rigorously observed – and the way business is really done.

The first generation of compliance programmes tends to be strong on codes of conduct, typicallycouched in off-the-shelf legal jargon. Often this is because they are created to fill a perceivedlegal gap and to have something to put on the corporate website. But they fail to engage theinterests of – or create incentives for – the people who matter: the frontline executives who dodeals and are judged on their successes and failures.

One of the most damning indictments of Siemens came from a Frankfurt prosecutor who complainedthat its compliance programme existed ‘only on paper’. Siemens claims to have learnt its lesson,and now presents its state-of-the-art programme as a commercial advantage. It includes a greatlyexpanded network of compliance officers, extensive training, tighter due diligence requirementsbefore taking on new business partners and the establishment of a compliance help desk. Thecompany argues that, on top of the legal and ethical benefits, tighter management controls meanthat it is better placed to withstand the downturn.

One significant weakness of early compliance programmes, often only partly addressed eventoday, is that they tend to focus on the letter of the law rather than the ethical principles thatunderlie it. For example, it is often written that it is especially difficult to comply with the FCPA inChina because there are so many state-owned enterprises that it is difficult to identify who is andwho is not a ‘foreign official’. The implication is that avoiding bribery of officials is all that matters,and that bribery of private businesses is somehow acceptable. A narrow legal approach does notalways provide all the answers.

Dealing with business partners

Even with the best-designed compliance programme, companies find themselves facingrepeated dilemmas at both strategic and tactical levels. In our recent experience working withclients in high-risk countries, many of the most intractable challenges concern business partners:

• First, the hazards of employing commercial agents to win business in return for large commissionsare clear. It is not a defence to claim ignorance if the agent passes on part of his commissionas a bribe: this has been made clear both in FCPA enforcement and – for instance – in theMabey & Johnson case. Despite all this experience, we still frequently come across caseswhere international companies pay bribes through commercial agents and representatives; thisis clearly unacceptable.

• A second, related question concerns the standards expected of business partners. If a companyhas overall control of a joint venture, the answer is clear: the joint venture should follow bestpractice as defined by the majority owner. However, minority owners naturally have less influence,particularly over day-to-day management matters. Suppliers raise even more questions: as oneclient put it, ‘We know we need to be sure of our major suppliers, but what about the dozens –or even hundreds – of minor suppliers? And what about our suppliers’ suppliers?’

• A third issue concerns consultants and fixers who arrange visas or help to pass goods throughcustoms. The US authorities have recently prosecuted a series of companies that paid customsofficers through intermediaries to reclassify goods to reduce the amount of duty. At a minimum,companies should ensure they are paying the correct duty, though it is difficult to achieve this injurisdictions where the rules are unclear (probably deliberately). Even when companies payfreight forwarders the accepted commercial rate for their services, it is often impossible to beabsolutely sure that their consultants do not pay off customs officers in one form or another.

PAGE 29RISKMAP 2010

At a minimum, companies need to be able to demonstrate that they have not knowingly brokenthe law, or deliberately closed their eyes to malfeasance. In practice, they often find themselvesmaking judgments based on imperfect knowledge, and this means that they have little option butto carry a residual element of risk.

Just say ‘no’, from a safe distance?

The risks associated with high levels of corruption and the heavy penalties for failure to control itraise the question of whether it is better for companies that wish to avoid bribery to stay awayfrom high-risk countries.

Research conducted by Control Risks and Simmons & Simmons suggests that this is an approachadopted by a significant proportion of Western companies. After questioning 350 internationalbusiness development directors from seven jurisdictions, we found that 35% of their companieshad been deterred from otherwise attractive commercial opportunities by the host country’s reputationfor corruption, with the highest percentages coming from the UK, Germany and the US. The lowestpercentages come from Hong Kong and Brazil: this may reflect the greater challenge of operatingin these companies’ home regions.

Percentage of companies deterred from an otherwise attractive business opportunity on accountof a country’s reputation for corruption

Source: Facing up to Corruption: A Practical Business Guide, Control Risks and Simmons & Simmons, 2007

US lawyer Andrew Brady Spalding has compared the impact of anti-corruption legislation toeconomic sanctions, arguing that the FCPA and similar laws deprive emerging markets ofmuch-needed investment by companies with high standards. From a governance perspective,the consequences are particularly perverse, in that responsible companies are replaced by whatSpalding calls ‘black knights’ – companies from countries with no legislation against foreignbribery that are likely to ‘pay what it takes’ to win contracts. Citizens of these countries lose outbecause they have fewer, more expensive and poorer-quality public works projects and becausefewer companies with high standards of corporate responsibility are prepared to invest.

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The way forward: moving beyond compliance to real engagement

Spalding’s argument appears to be an accurate description of what does happen. It raises thebroader question what should happen. We share Spalding’s view that simply staying away fromhigh-risk countries is not the best answer. But if that is the case, governments, companies andcitizens need to be involved in finding solutions that work better.

First, the emphasis on improving and tightening enforcement of national and international legalinstruments needs to be strengthened. Key items on the agenda include the implementation byall signatories of the OECD anti-bribery convention, and the strengthening of regional anti-corruptioninitiatives such as that of the Organization of American States. Well-run international companieshave a clear interest in ensuring that both their own governments and those of their competitorsoperate to the same standards.

Secondly, host governments need to build up their defences. In the domestic as in the internationalarena, laws are important, but not sufficient. ‘Technical’ solutions are also vital: for example,internet-based means of paying taxes have reduced the scope for corruption in India and manyother countries. More importantly, governments must engage their own citizens, for instance bydemonstrating support for civil-society organisations that combat corruption and promote highercorporate standards. Ultimately, the reward for reform should be more investment by better companies.

However, all this will take time. Both at the national and the international levels, the impact ofinitiatives to raise governance standards will be slow and cumulative, with no major break-throughs expected in 2010. So does that mean that ethical companies should simply sit on thesidelines while Spalding’s ‘black knights’ seize all the commercial opportunities in high-risk countries?

We think not. Our view is that international companies can operate successfully in high-risk countries,but it requires moving beyond a narrow emphasis on legal compliance or problem-avoidance –though compliance with local and international law is of course essential – to develop effectivemeans of engagement that focus on positive incentives:

• Business integrity programmes should be founded on ethical principles, not simply on legalinterpretations of regulations. The objective of integrity training should be to support front-linemanagers, and to empower them to make the right judgments, even under stress.

• In choosing and working with partners and suppliers, companies should put the emphasis asmuch on quality and professionalism as on avoiding legal malfeasance. The issue is not justthat bribery is wrong: it is expensive, legally dangerous and ultimately unsustainable. Well-runcompanies should be able to offer their local partners commercial incentives, in the form oflong-term business relationships, to raise professional standards.

• In designing business integrity programmes, companies should focus on two different levels. Onthe one hand, they need to ensure that everyone in the company understands its fundamentalethical principles. On the other, they need to focus on areas of greatest risk. These typicallyinvolve specific transactions, such as applying for licences or dealing with customs, rather thanentire countries.

• Finally, honest business in high-risk countries demands more skill, but is more sustainable thanturning to bribery. The skills include knowing how to find the right partners and how to resistdemands for bribery, even when backed by a form of extortion. It is essential to prepare forthese kinds of threat in advance through proper training.

International anti-corruption laws are ‘working’ in that they have placed corruption squarely on thecorporate agenda. But this is only the first stage. To succeed, business development directorsmust find ways of going beyond compliance to real engagement, even with – or especially with –high-risk countries.

John Bray, Director Analysis

PAGE 31RISKMAP 2010

The first decade of what was supposed to be the ‘Asian century’ has been dominated by the chainof global events that followed the 11 September 2001 terrorist attacks on the US. But even as theUS and its policies in Iraq, Afghanistan and elsewhere remain a leading focus of world attentionin 2010, developments taking place further east will be the primary portents of change in the globalpolitical and economic landscape. While the notion of ‘Asia’s rise’ often involves vague future-gazinginto a world beyond 2050 where several Asian countries may or may not have surpassed Westernpowers, in many ways it is very much about current or looming realities.

Business leaders are typically more aware of this than most – Asia’s rapid economic growth hasalready changed the world economic, investment and business landscape in many sectors, and muchmore is to come. In 2010 and for many years thereafter, what will be felt above all will be the risenot of Asia, but of China, which will surpass another Asian country, Japan, to become the world’ssecond-largest economy. The IMF expects China to contribute 28% of world economic growth in 2010.

GDP forecasts for selected economies, 2015-50 (US$bn)

Source: Goldman Sachs

China is still frequently spoken of in the same breath as India and the BRIC countries, but this fails torecognise both its status as the only country besides the US that might genuinely warrant the ‘superpower’label in the foreseeable future, and its unique importance in economic terms. China’s economy is nowlarger than the other three BRICs combined (roughly three times as large as Russia and Brazil, andalmost four times as large as India), and is still growing 50% faster than the next fastest, India.

Going out

The global financial crisis and subsequent economic slump have amplified the trend of China’sincreasing clout, and accelerated the shift into another phase of its rise. From the 1980s until quiterecently, the story resulting from China’s open-door policy was one of the world going to China. Aswe enter the second decade of what China sees as its own century rather than an Asian one, thestory is increasingly becoming one of China going into the world – the open door swings both ways.

China’s growing role on the world stage is about more than economic growth and energy, but these certainly lie at the heart of the shift into the more global era of the country’s emergence. China’s overseasinvestments are driven mainly by three aims: resource-seeking, strategic asset-seeking and market-seeking. The first of these is where China’s ‘going out’ began and, together with the second aim (seekingthe know-how to operate internationally, but also tangible assets such as advanced proprietary technology),is causing most concern. The scale and speed of economic growth has seen the country go from a netexporter to one of the world’s leading importers of energy, particularly oil, in a relatively short space oftime. This imperative for Chinese activity abroad will remain strong for the foreseeable future.

China’s latest, greatest leap – out into the world

US

JapanGermany

China

BrazilRussia

India

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2015 2020 2025 2030 2035 2040 2045 2050


China’s oil production and consumption, 1990-2010

Source: EIA International Energy Annual 2006; Short-Term Energy Outlook (July 2009)

Meanwhile, over the past few years China has accumulated massive foreign exchange reserves,and resurrected its state-owned enterprise (SOE) sector to spawn several large, profitable andambitious companies (leading private companies are also looking abroad, but most of the big,active firms are SOEs). Both developments have facilitated outward FDI and mergers and acquisitionsby Chinese entities. According to the UN Conference on Trade and Development (UNCTAD)’s2009 World Investment Report, Chinese outward FDI rose to $52bn in 2008, up by about 150%on 2006 and 2007 figures, and rising at a far faster rate for years than inward FDI. Had multi-billion-dollar bids like Chinalco’s attempt to up its stake in Rio Tinto succeeded, outward FDI flows in 2009might have exceeded inflows for the first time.

Foreign exchange reserves, Aug 2009 (US$bn)

Source: IMF. China, South Korea figures September; Saudi Arabia, May; Algeria, April.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1990 19941992 1996 1998 2000 2002 20062004 2008

Production

Forecast

Net imports

Consumption

2010

Thousa

nds

of

barr

els

per

day

0 500 1,000 1,500 2,000 2,500

China

Japan

Russia

Saudi Arabia

Taiwan

India

South Korea

Hong Kong

Brazil

Singapore

Germany

Algeria

US

France

UK

PAGE 33RISKMAP 2010

Seeking stable supply

Resources companies are certainly no longer the only players involved, but remain key actors inmoves abroad. China sees world markets for energy and some other resources as dauntinglyvolatile and unreliable, and as overly influenced by Western powers, mainly the US. As a result,Beijing has felt that it has no choice but to get serious fast about securing supply from overseas,to mitigate the risk of being unable to feed its economy. This has taken Chinese diplomacy andinvestment all over the world. From oil and gas to copper and coal, and from neighbouringRussia, Kazakhstan and Mongolia to further afield in the Middle East, Africa and Latin America,China’s efforts to secure resources will continue to make waves in 2010.

This in itself need not be seen in the threatening light that it often is. China’s leaders would be incompetentif they were not actively seeking to secure long-term sources of energy security, and their unease withthe idea of relying on markets and regions over which they have little influence is not difficult tounderstand. By taking ownership stakes in foreign energy reserves and mineral deposits, securinglong-term supply agreements and developing or maintaining close ties with governments in producingcountries, Beijing hopes to reduce the risk of suffering the kind of supply shock that could prompteconomic and political crisis at home. Meanwhile, as in other areas of industry, China hopes to developnational champions that can eventually compete as world-class players in global markets, a goal sharedby the companies themselves. For China’s national oil companies (NOCs), with insufficient reserves anddeposits at home, this inevitably means going abroad, while leading Chinese firms in other industriesare looking to overseas investments for their own development – for example in autos, banking and IT.

China’s crude oil imports by source, January-May 2009 (thousands barrels per day)

Source: FACTS Global Energy

Pursuit of profit, or ‘grand strategy’?

What makes all this worrying for foreign governments and companies is that most of the Chineseentities making investments and acquisitions are state-owned or partly state-owned – with thestate in question an authoritarian one. This naturally creates the suspicion that they are actingnot out of pure commercial interest, but also in pursuit of political or national strategic goals thatmay conflict with the interests of foreign companies and governments. Insofar as Chinese companiesare seen as mere tools of a monolithic ‘China Inc’ directed by top leaders in Beijing according toa co-ordinated grand strategy for world domination, this is very misleading. Compared with Japanand Korea, China has actually struggled to effectively control industrial development according toa clear central plan, and leading SOEs are typically subject to all sorts of competing bureaucraticinterests, as well as having their own preferences.

Saudi Arabia, 740

Iran, 544

Angola, 451Oman, 275

Sudan, 217

Kuwait, 171

Congo, 115

Kazakhstan, 97

Libya, 93

Others, 582

Russia, 299


Nonetheless, the fact is that most big SOEs, especially in the extractive sectors, are clearly subjectto substantially greater political influence than private companies. Heads of big SOEs are appointedby the Communist Party of China (CPC) personnel department, and usually have held governmentand party positions in the past. The lack of transparency surrounding the status, control, motives anddecision-making processes of SOEs exacerbates suspicions. So too does the fact that Chineseentities often play by different rules. For example, in addition to claims about higher levels of corruptionand lower standards of corporate social responsibility, Western firms often complain that Chinesecompetitors overpay, and secure resources deals via big government-to-government agreementsincluding incentives such as easy loans and help to build infrastructure. There can be little questionthat, where China and its NOCs and other SOEs are concerned, the interests, decision-making andactions of government and business are more closely intertwined than in most developed countries.

Western companies had better get used to dealing with the Chinese approach. Chinese firmsface a still-steep learning curve, and feel that they have to use different tactics to compete againstmore advanced and better-established international competitors for the relatively few opportunitiesthat come up for big, attractive deals. Particularly in the resources sectors of the developing world,this will continue to pose problems for competitors finding that China’s presence is handingincreased bargaining power to producer governments and reducing pressure on them to improveoperating environments. China will often be seen not only as a convenient alternative investor orbuyer to play off against others and raise prices, but also as a key future source of demand.

In case there was any doubt that China will sometimes make big, bold bids that step directly onthe toes of Western majors, reports in September 2009 indicated that China National Offshore OilCorporation (CNOOC) was looking to take 49% equity in more than 20 oil concessions in Nigeria,at a time when the government there has been locked in negotiations with Western oil multinationalsover contract terms. From a purely political perspective, too, China will continue to represent acounterbalance to US influence and give greater leverage and manoeuvrability to states from‘anti-US’ Latin American regimes such as Venezuela and Ecuador, to the likes of Burma(Myanmar), Sudan and, perhaps most importantly in 2010, Iran.

Not all plain sailing

Chinese support of such countries, and the big deal-making of its leading SOEs and sovereignwealth fund, China Investment Corporation (CIC), will continue to make news in 2010. To get thisin perspective, Chinese outward FDI is still small compared with many Western countries – in2008 it was about one-sixth that of the US, and still less than Belgium and the Netherlands.Chinese energy companies remain quite minor international players compared with Westernmajors and the national companies of major producers. China’s energy deals and ‘raids’ ondeveloped markets in particular cause a splash disproportionate to their size in commercialterms. They will also continue to face serious challenges, as demonstrated by the hurdles facedby Chinese mining companies seeking in 2009 to invest in Australia – a country basically open toforeign investment and with much better relations with China (at least until quite recently) thanmany other potential target countries.

Concerns about reputation and image will also complicate China’s ventures out in the world. It isoften suggested that Beijing is impervious to international opinion and disregards issues of peaceand stability if it can gain economically or strategically. There is certainly an element of truth inthis perception, but these issues are a growing factor – albeit not a dominant one – in Chinesethinking about their overseas activities. Human-rights-related criticism of its presence in placeslike Sudan and Guinea has been seriously discussed in Beijing, while anti-Chinese sentiment inseveral countries where Chinese economic influence is significant is a current and future sourceof problems for China. As well as handling local governments’ concerns, such as over the impactof cheap Chinese imports, the problems of being a big overseas player were highlighted in 2009by threats, protests and even violence against Chinese people and interests in countries includingPakistan, Nigeria, Turkmenistan and the Solomon Islands.

Dealing with such issues is demanding a more nuanced and sophisticated foreign policy and is alearning process for China’s government. Chinese firms face an even steeper one. Problems completingdeals (including in the US and Australia), the disappointing results of non-resources deals (such asLenovo and IBM, and SAIC and Korean automaker Ssangyong) and the much-criticised losses CIC

PAGE 35RISKMAP 2010

has made on some of its investments all reflect barriers to and weaknesses of leading Chineseenterprises that will not be quickly overcome. But with Chinese entities likely to have some of thedeepest pockets around in 2010, they will adapt their tactics and target other areas rather than giveup, forcing some difficult decisions in developed countries about allowing or blocking investments.

Non-Chinese businesses involved in such deals will have to weigh the benefits of Chinesefinancial resources against the likelihood that their prospective partners may want more controland take a more intrusive approach than typical investors. At least where state-controlled entitiesare involved, opacity and uncertainty will often exist. The other side of the great 2009 Sino-Australianmining saga – the detention of four Rio Tinto employees in Shanghai on charges includingcommercial bribery – highlighted a feature of dealing with China that applies both inside andoutside its borders: the blurred lines between the commercial sphere and the realms of politicsand national interest.

Testing the limits

A likely test of China’s intentions in 2010 will be how it deals with its major headache over Iran.China benefits from Iran’s isolation in that it helps China to access its vast oil and gas fields, freeof competition from Western firms. The Iran relationship also fits with China’s wider goals ofbalancing against perceived US hegemony in general, and its control of supply routes in particular.But another crucial pillar of China’s foreign policy for decades has been avoiding confrontationwith the US. Chinese analysts see the overstretch of the Soviet Union, including in the MiddleEast, as a key reason for its downfall, and do not wish to repeat that mistake.

One reason that China has been so active in Africa is that it views the continent as more easilynavigable without clashing with US interests. China never wants to be in the position of having togo head-to-head with the US on core national security issues, and also has its own strong interestin averting military conflict in the Middle East, from where it gets about half of its oil supplies. Onboth North Korea and Iran, China has so far been able to avoid being forced into a ‘final choice’at the UN Security Council. It will hope to continue avoiding one in 2010, but if it cannot, itsresponse will be a notable indicator of where its priorities lie.

This is one of many examples of how China’s foreign policy challenges are becoming increasinglycomplex. Its long-standing principle of non-interference in the affairs of sovereign states hasalready been greatly compromised over the past decade, as reflected in the fact that it currentlyhas troops and police participating in nine UN peacekeeping missions around the world. But asChina’s interests proliferate and it looks to protect them, it is being forced to become an evermore active player. Beijing still prizes the goal of maintaining a stable external environment tofacilitate domestic stability and development, but the policy of keeping a low profile and avoidingconfrontation (‘hiding claws’ as former paramount leader Deng Xiaoping is famously supposed tohave put it) is becoming more and more impractical.

Eyes on Asia

In the cases of the dilemmas over Iran and North Korea, China’s influence poses it some awkwardproblems, and much of the time Chinese leaders are still keen to play down their country’s power.But the overall trend visible on several occasions in 2009 is towards selectively asserting itsauthority more robustly and more frequently. This will be seen again in 2010, particularly withinAsia, where, in contrast to the Middle East and Africa, China has far greater capability and intentto test the limits of its growing power.

This will still mainly take the form of economic power – trade with China is currently moreimportant to most Asian countries than trade with the US, and China’s role as a crucial marketand investor gives it substantial clout. It will continue to increase and use this leverage to maximumeffect. A few notable examples are its relations with countries like Burma, which give it access tothe Indian Ocean as well as energy resources; its deals in Central Asia, including Kazakhstanand Turkmenistan, which have agreed to provide China with natural gas; its ties through Pakistanto Iran, in what is becoming known as ‘the new energy Silk Road’; and even its relations withcash-strapped Russia, to which China has extended substantial loans and with which it is tryingto sign large gas deals.


With China already engaging in active foreign policy close to home, areas that it has always seenas its core sphere of influence will yield important clues to how it intends to wield its growingpower. Economic and commercial means will remain at the centre of China’s approach, but it isnot always averse to more robust methods. More frequent Chinese incursions across part of thedisputed border with India have been reported in 2009, and great pressure has been exerted onVietnam, with which China has maritime border disputes in the South China Sea (it has foughtwars with both countries within the past 50 years).

A further ratcheting of tensions with India is quite conceivable in 2010 – India is China’s leadinglong-term competitor for influence in Asia, along with Japan and the US, and Beijing has shownstrong signs of upping the ante ever since India moved closer to the US under former USpresident George W Bush. China will continue to see co-operation between those three statesand others as a US-led attempt to encircle it and stifle its rise – a genuinely-held fear that cansometimes inform Chinese interpretations of foreign actions ranging from commodity price andsupply issues, to Western media coverage of ethnic unrest in Xinjiang and Tibet.

In this context, little-noticed but particularly interesting (albeit not unprecedented) signs of China’sgrowing determination and confidence in asserting itself close to home came in March 2009,when Chinese vessels harassed a US surveillance ship off Hainan, a Chinese island off its southcoast that is home to a new submarine base. Then in June 2009, a Chinese submarine collidedwith an underwater sonar device being towed by a US vessel in waters off the Philippines. Chinawill remain utterly unwilling to consider serious confrontation with the US in all but the mostextreme circumstances, but it would not take much for a mishap in some similar incident to sparkoff a major diplomatic dispute and nationalist backlash in China.

Money talks

On balance, and important though the above areas will be as clues of Chinese intent, it is in theeconomic sphere that China’s increasingly active global presence will probably be felt most in2010. High-profile investments abroad are one part of this, but most will be primarily significantas symbolic indicators and test cases rather than having huge global consequences. WhereChina will matter most in the next few years will be in its wider role in the world economy. Thisincludes the question of its massive holdings of US debt. Fears that Beijing will use this as aweapon to hold the US to ransom, or wreak havoc by selling off dollar assets on a huge scale,are highly unlikely to play out. Beijing’s 2009 noises about moving away from the dollar as theworld’s reserve currency do not portend China’s emergence as an irresponsible and destabilisinginfluence at the top table of world economic affairs. Leaders in Beijing are obsessed with stability,but also with rebalancing an international system and institutions it considers skewed to favourthe interests of rich Western powers. China will certainly continue to demand – and sooner orlater will probably get – a much bigger voice in institutions like the IMF, and in bilateral talks withthe US. Meanwhile, Beijing’s handling of its domestic economy, with big decisions looming overcurrency and monetary policy pressures, and potentially painful reforms to unleash domestic privatedemand will have repercussions that echo far beyond its borders, not least in Washington.

Andrew Gilholm, Senior China Analyst

PAGE 37RISKMAP 2010

Africa

2010 heralds mixed prospects across sub-Saharan Africa. The implications of the global economicdownturn have varied widely, and the path to recovery will likewise not be uniform. The continentin general is likely to be out of step with the prevailing international trajectory. While a handful ofcountries – among them Congo (DRC) and Nigeria – will begin to feel some relief in 2010, manyothers may find themselves suffering a second wave of recessionary after-effects. Increasedunemployment or underemployment, state spending cuts, high consumer prices and the slowrecovery of remittance rates from abroad will all have political and socio-economic consequences.

Weathering the storm

Through 2008, the general sense among Africa’s finance ministers and central bank governorswas that the continent was and would remain relatively insulated from the effects of the globalfinancial crisis. By and large, they appear to have been right: growth on the continent has generallybeen steady, though it is likely to have fallen to below 3% in 2009 – about half the average annualrate seen since 2000. Most countries are expecting to see the beginnings of an upturn in 2010.

These figures, though, do not tell the whole story. There is evidence of increased structuralresilience across Africa’s markets to the types of challenge thrown up by the economic crisis.However, there are clearly limitations to the role that governments can play in guiding thepost-slump recovery. With their export-led growth models, most countries will have little choicebut to wait for global recovery to buoy them in its slipstream.

This generalisation is to some degree challenged in the continent’s two largest economies, SouthAfrica and Nigeria. Both have been disproportionately affected by the downturn, but at the sametime have a wider range of resources to deploy, and greater room for manoeuvre, in managingtheir recoveries. The implications of the downturn are perceived to have been more pronouncedfor South Africa, given its neater integration into global markets. Meanwhile, the crisis has alsoprovided a sharp reminder that even the most sophisticated economy on the continent is stillhugely exposed by its reliance on primary commodities, having been badly buffeted by thevagaries of world metal prices. The country is set to run its first budget deficit since 2006, whilethe financing requirements of its counter-cyclical capital-spending programme stand to heightendebt-financing pressures to levels not witnessed since the late 1990s. The 2010 football (soccer)World Cup tournament will undoubtedly provide a stimulus effect, while moderate concessions tobusiness during the crisis have demonstrated a degree of adaptive capacity on the part ofgovernment. However, overall the crisis has only accentuated the political challenge of managingthe economy and emboldened the left’s demands for change – a dynamic that will reverberatethroughout President Jacob Zuma’s term of office.

Nigeria’s commodity vulnerability has also been made even more apparent, with the slump in oil prices bringing a close to 40% dip in the value of its 2009 exports and threatening the long-term viability of oil windfall savings. Signs of stabilisation in oil prices will be welcome. But the feasibility of a government amnesty plan for Niger delta militant groups – which were responsible for attacks on oil facilities that saw production levels plunge by 30% in 2009 – could be called into question as politicians position themselves for a boisterous campaign in 2010 ahead of the 2011 polls. Moreover, the government’s frantic search for deficit-financing sources and talk of more borrowing to sustain infrastructure investment will test adherence toimproved levels of fiscal discipline.

Continuing commodity dependence

Elsewhere, the crisis has shone a spotlight on continued primary commodity dependency in almostall other sub-Saharan countries. It has reinforced long-standing obstacles to diversification, bothby hampering efforts to raise domestic revenues and by reducing the prospect of FDI inflows intonon-traditional economic areas such as labour-absorbing manufacturing and services, as well asthe commercial exploitation of previously untapped primary commodities.

Moreover, attempts to stimulate investment have to rely predominantly on measures such as taxcuts or periods of tax exemption, or the subsidisation of energy to industrial or commercial consumers.

Regional overviews


In light of such measures, even when investment inflow figures start to look healthier, it is questionableto what extent governments will be in a position to extract benefits from them, particularly in theform of revenues or employment guarantees.

Thus, despite pre-crisis perceptions of Africa as the last frontier for investors of all shapesand sizes, commodities are set to remain the primary – if not sole – determinant of Africanmarkets’ relevance and direction. The continent-wide balance of power and balance of interestsbetween governments and foreign investors has barely altered, despite some positive trends inindividual countries.

Open for business

The continent’s traditional attractions are still the main draw for investors from China and otheremerging markets, despite their increased sensitivity to the need to pay lip-service to the economicaspirations of domestic governments. State-backed Chinese companies acquired oil reserves inCameroon, Gabon and Nigeria in 2009, and will be looking to make headway into Uganda andGhana, as well as offshore reserves off Liberia and Sierra Leone, in 2010. They are also likely toseek to consolidate major mining deals in Guinea, and acquire additional mining assets in countriesfrom Liberia to Zambia.

Notably, the model that Chinese interests initially used to break into sub-Saharan extractiveopportunities – whereby infrastructure construction and loans were exchanged for access to mineralresources – shows signs of being replaced by more traditional deal structures, supported by localbanks that are also increasingly being bought into by Chinese interests. The change of approachis likely to enable a wider breadth of Chinese penetration across sectors.

At the same time, 2010 will see the stepping up of interest in Africa from other emerging marketplayers. The free-trade agreement (FTA) between India, Brazil and the countries of the SouthernAfrica Customs Union is likely to finally be cemented. Meanwhile, Russia’s hastening of debtforgiveness, along with President Dmitry Medvedev’s tour of oil- and mineral-producing countriesin mid-2009, is expected to foreshadow enhanced strategic investment from that quarter.

No more no go

The entry of new players, and the expansion of the interests of China and other emerging marketsare increasingly coming to mean that no part of the continent is off-limits in terms of investmentpotential. Even in Somalia, oil companies are waiting impatiently for the chance to begin exploringlong-held blocks in its somewhat less anarchic semi-autonomous regions. Beyond that, the Hornof Africa’s variable security climate has proved no deterrent to business, illustrated by the volumeof Chinese investment in Ethiopia in recent years.

In the continent’s other principal problem area, the Great Lakes region, increased investor interestis having a positive effect on the security situation. The unexpected rapprochement betweenRwanda and Congo (DRC) at the start of 2009 is being consolidated largely on the back of a shiftin emphasis from Rwanda. Kigali has ambitious plans for the development of a methane-extractionand energy-generation industry around Lake Kivu on the shared border, as well as wider economicgoals. These were not being aided by continued international perceptions of Rwanda as adestabilising influence in eastern Congo.

Equally, an improvement in relations between Uganda and Congo (DRC) is largely being drivenby mutual pragmatism over the need to create conditions that will facilitate the development of aviable oil sector on both sides of the Albertine Graben. Further assets are likely to be confirmedin the area in 2010, adding to already significant oil finds there.

Although the spike in piracy in the Gulf of Aden has eclipsed maritime insecurity in the Gulf ofGuinea during 2009, the region will remain a hotspot for pirate activity in 2010. Attacks will beespecially prevalent in Nigerian waters and, increasingly, offshore Cameroon. However, theever-evolving tactics of Niger delta-based militant groups and copycat pirate gangs mean thatareas as far west as Sierra Leone, where prospective oil finds have recently come to light, andas far south as Equatorial Guinea may not be immune to insecurity.

PAGE 39RISKMAP 2010

Infrastructure deficiencies to hold back progress

One risk that will re-emerge as recovery kicks in is infrastructure deficiency, which has been inmany cases slightly – but only temporarily – alleviated by crisis-related falls in the use of port andother transport facilities, and in demand for energy. Major upgrade projects, including Botswana’sMorupule B coal-fired power plant and power-generation facilities in South Africa and Zambia,have been delayed – in some cases due partly to temporary reductions in consumption, butlargely because of a shortage of finance. In the Morupule case, insufficient funding is allied withthe obstacle of South African power utility ESKOM’s stalling over signing a power-purchasingagreement, despite the country’s critical need for new capacity to support existing as well asnew investment.

Given the suspension of new projects and the simultaneous falling off in maintenance spending,much key but already overstretched infrastructure will be in a worse state of dilapidation post-crisisthan it was two or three years ago. The consequent lack of spare capacity to support an economicupturn will once again impose an unbreachable ceiling on growth and expansion prospects pendingprogress in key upgrades. South Africa is an important exception; the 2010 World Cup infrastructurebudget has provided generous resources for infrastructure ancillary to the tournament, as well asfor more general projects such as port upgrades.

Feeling the strain

The state of infrastructure supporting economic activity, however inadequate, is still vastly superiorto the utterly abject state of the services provided to many ordinary people. Where demand isstretched, it is the general public that tends to lose out as scarce resources are channelled toinvestors. The continuing infrastructure deficit, along with resurgence in demand, is likely to seeincreasingly regular electricity and fuel shortages (and therefore increased transport costs).These stresses are likely to be accompanied during the course of 2010 by recovery-linked risesin food prices.

Such circumstances, in tandem with the reduced ability of governments to spend to appeasefractious public opinion and mask their limited legitimacy, will increase the likelihood of outbreaksof popular volatility across many parts of the continent. Countries including South Africa,Senegal, Kenya and Mozambique are particularly at risk. With potential orchestrating forces –notably labour unions – seeing their influence and bargaining power considerably dampened bythe continuing effects of the crisis on availability and security of employment, discontent is likelyto manifest itself in less focused ways, such as spontaneous civil unrest and sabotage.

Kenya in particular is one to watch. The extent of disorder seen in response not only to economicconditions, but also events such as the publication of census results early in 2010 and anyprosecutions of senior political figures by the International Criminal Court, will provide a usefulindicator of the atmosphere that will surround preparations for the next elections, due in 2012.

Governments not under threat

However, neither unrest nor any wider effects of the financial crisis are likely to materially underminethe legitimacy or survival prospects of incumbent governments. In all looming elections, inherentand usually long-standing domestic factors will be key in determining outcomes. Presidentialelections due in Burundi, Burkina Faso, Guinea, Togo and Tanzania in 2010 will each showcasea different dominant dynamic in the spectrum of familiar sub-Saharan themes.

The sudden death of a long-standing authoritarian leader in Guinea has exposed the hollownessof state structures, and the extreme weakness of the foundations for democratic and civiliangovernance. In Burundi, an externally mediated and imperfectly executed post-conflict transitionhas left a country that may be able to weather the test of an election, but where the zero-sumlogic of war is only slowly being softened. In Burkina Faso, Togo and Tanzania, to varying degrees,the failings of dominant parties may result in popular disenfranchisement and disenchantment,but incumbents are vulnerable primarily to internal machinations rather than opposition threats. Innone will the fallout from domestic or international economic events genuinely alter the electoralplaying field. In all, the incumbent is likely to remain in office.


Put away the red flags

We see relatively few red flags marking the broad political risk landscape for investors in Africa in2010. By and large, most countries have stayed the economic liberalisation course and resistedthe temptation of knee-jerk responses to the financial crisis. No African country save for theSeychelles has been in real danger of sovereign-debt default despite the financial crisis, testifyingto improved domestic economic management in recent years and a broader international refusalto allow vulnerable countries to fail.

While rhetoric on resource-nationalisation and ‘use it or lose it’ ultimatums has become morecommon, this has generally been aimed at appeasing a domestic audience. Governments by andlarge appreciate that they have neither the expertise or credibility – nor probably the desire – torun key economic sectors. In cases where the government intervened directly in investment projectsin 2009, notably in Congo (DRC) and Guinea, drivers were more political and strategic thaneconomic. All provide positive indications that governments generally continue to recognise theneed to maintain consistency for investors regardless of short- and medium-term pressures.

Americas

When the financial crisis took a turn for the worse with Lehman Brothers’ collapse in October2008, many analysts were quick to forecast economic and political mayhem in Latin America.The pessimism seemed well founded: 25% of all financial crises since 1970 have taken place inthe region. Capital flight was a serious problem for much of the 1980s and historically high debtlevels made the region vulnerable to shifts in the economic mood – it was hard hit by the 1998Asian crisis.

A year on, most analysts have turned out to be wrong. Of course, local economies were affected,but the stereotype of a populism-prone, commodity-dependent region has been shattered. ManyLatin American countries have benefited from sustained reforms and greater political maturity.But the region’s performance during the recession may generate complacency that allowsreforms to run out of steam. The new optimism might be as misplaced as earlier pessimism.

Confounding expectations

Latin America’s performance during the recession is partly because its governments havebecome much savvier at managing their resources and adopting prudent macroeconomic policy.Even in countries with a more anti-market bias – such as Argentina, Venezuela and Ecuador –governments have been smarter than expected. Despite a sharp fall in oil prices, VenezuelanPresident Hugo Chávez managed resource windfalls better than his critics expected and kept hispopularity afloat. In Argentina, predictions of renewed financial collapse have proved far-fetchedso far. While the methods are at times questionable – nationalisation of pension funds inArgentina and of foreign assets in Venezuela – the populists have recognised the limits of someof their anti-market policies. The long-term sustainability of these methods is also questionable:high levels of state involvement and public spending risk leaving an overburdened economy forthe next administrations.

Progress is undeniable where moderate governments have been in power. Brazil, Chile,Uruguay, Colombia and Peru have all suffered to varying degrees, but will continue to respondwith a high level of political stability and sound economic policy. With a few exceptions, the resolutioncost of financial crises for governments in the region has progressively diminished over theyears, suggesting that decision-makers have learnt the lessons of past catastrophes andimproved their policy frameworks.

PAGE 41RISKMAP 2010

Financial crises in Latin America and their costs since 1970

Source: IMF, World Bank

Expectations of a shift towards populism have also been confounded. Electorates appear to havegreater trust in democratic institutions – or at least are learning to be sceptical of radical promises.Populism has its successes, but the Kirchners’ dwindling popularity in Argentina shows that it isno longer seen as a bargain: they are heading for a fall in 2011. However, institutions are notstrengthening as quickly as is desirable: Colombian President Álvaro Uribe is struggling to resistthe lure of a third term; Chávez, Ecuadorian President Rafael Correa and Bolivian President EvoMorales remain addicted to constitutional referendums; and Nicaraguan municipal elections weretainted by fraud allegations.

But the image of Latin America as riddled by coups and caudillos is no longer accurate. The oustingof Honduran President Manuel Zelaya in June 2009 bucks a long-term trend of decline in suchoverthrows. The radicals grab the headlines, but are the minority. For every Chávez, there arenumerous moderate counterparts: Luiz Inácio ‘Lula’ da Silva in Brazil, Michelle Bachelet in Chile,Tabaré Vázquez in Uruguay, Felipe Calderón in Mexico. All are based around the centre-left orcentre-right of the political spectrum, and will continue to favour economic austerity and welcomeforeign investment. With the exceptions of Venezuela and Argentina, arbitrary state interventionand political instability have generally been restricted to smaller economies, such as Nicaragua,Bolivia, Guatemala and Honduras. And while the likes of Nicaragua are likely to persist in thistrend, others – notably Argentina – seem to be heading towards a more market-friendly shift inthe medium term.

Argentina 2001

Nicaragua 2000

Colombia 1998

Ecuador 1998

Argentina 1995

Paraguay 1995

Brazil 1994

Venezuela 1994

Mexico 1994

Argentina 1989

Colombia 1982

Uruguay 1981

Chile 1981

Argentina 1980

0 10 20 30 40 50 60

2

2

2

22

2

2

4 1

1

1

11

111

1

25% of systemic banking crises globally since 1970 have occurred in Latin America

Resolution costs as percentage of GDP

Nu

mb

er

of

cris

es


Successful coups in Latin America since 1960

Source: SEC

Running out of steam

The region’s success to date in dealing with the crisis will influence the kind of threats thatinvestors face in the years ahead. In the past, multinationals have worried about nationalisationand creeping expropriation, but we believe the greatest political risk in the next few years will beimmobility. There is a risk that governments in Latin America will lose the motivation to persistwith much-needed reforms, such as fixing inefficient and distorted tax systems and reforminginflexible labour markets. The difficulties Calderón has faced in his efforts to reform Pemex inMexico and Lula’s inability to deliver on the government’s promise of a tax overhaul reveal someof the political failures overshadowed by the financial crisis. It is no longer a case of proving toinvestors that policy can be competently implemented or that decision-makers care aboutmacroeconomic stability. As a maturing region, Latin America needs reforms that facilitate privateinvestment and make companies’ lives easier, ultimately ensuring sustainable economic growth.

Despite successes in macro policy, the region still suffers from problems that hamper itsattractiveness to investors. The broadly successful handling of the financial crisis may generatecomplacency, softening the political will to push for greater change. Tax and labour reforms,streamlining of the public sector and other crucial overhauls require hard-won consensus inparliaments and great efforts to win over public opinion – particularly in Latin America, wheremulti-party systems with proportional representation are common. Corruption – both in the privateand public sector – also remains a significant concern, with the region’s three major economies(Brazil, Argentina and Mexico) showing no improvement in international surveys such as TI’sCorruption Perceptions Index (CPI). Without strong commitment, governments will not be able topass such reforms. These types of reform also require taking away entitlements from those whobenefit from current distortions. Europeans and Americans can attest to the difficulties ofimplementing such measures when gains are widespread and costs concentrated (hence lobbies’potential for obstructing spending cuts and other kinds of restructuring).

The risk of immobility may not seem as drastic as expropriation or nationalisation, but if acute itcould stall growth potential in the medium-to-long term. In a worst-case scenario, this could breedsocial discontent, causing future complications for private companies in the form of social unrest.

0

4

6

8

10

12

14

Honduras 2009

1960s 1970s 1980s 1990s 2000s

PAGE 43RISKMAP 2010

Spending and unions

Part of the standard government response to the financial crisis has been strong fiscal stimulusmeasures, used to prop up social programmes and public-sector employment. Spending packagesaimed at boosting infrastructure investment have also been common, with Brazil, Argentina andColombia leading the way. However, as the recovery progresses, governments will find it hard tocut these new entitlements from their beneficiaries, particularly given the strength of public-sectorlobbies around the region. Elections will be held in 2010 in Brazil, Colombia, Peru and CostaRica, and no incumbent will be willing to significantly reduce state assistance in this context.Indeed, electoral spending might have the perverse effect of consolidating some of the measurestaken during the crisis, making it even harder to reduce assistance beyond next year. Badly timingthe withdrawal of government support could equally leave economies exposed at the wrong moment,sowing the seeds of future unrest.

Within this new regional context, project-specific risk will become especially important for companies.While ‘hard’ political risks such as expropriation are likely to continue to become less acute inmost states, ‘soft’ political risks – such as community activism and labour relations – will almostcertainly gain in importance. Companies’ relationships with labour unions, for example, will haveto be thoroughly monitored because these groups are gaining leverage. Even where governmentshave broadly accepted market-friendly principles, unions such as the Petroleum Workers’ Unionin Mexico or the Main Central Union for Workers (CUT) in Brazil are powerful. Community activists– whether indigenous groups, environmentalists or human rights advocates – will also becomeincreasingly organised and co-ordinated, and cause business interruption when they see fit.

The US factor

The Latin American region’s growing commercial links to non-traditional markets, especiallyChina, are another reason why much of the region could handle the downturn once the US economyplummeted. Mexico, hugely dependent on its northern neighbour, was a clear exception.

The shift was partly a result of being ignored by the George W Bush administration. Althoughmost leaders welcomed the arrival of President Barack Obama, he will not substantially alter hispredecessor’s policy. Rhetoric aside, Latin America remains a low priority on Obama’s foreignpolicy agenda and he is unlikely to engage comprehensively with the hemisphere.

In 2010 the status quo is likely to prevail in north-south relations. The US continues to focus itsattention on conflicts in the Middle East and on its relationship with Russia and Asia. Trade pactsare likely to remain in limbo and the withdrawal of US agricultural subsidies that would open upthe market for Latin American commodities seems an unlikely prospect. Despite hints of concernover growing Chinese involvement in the region, the US administration is unlikely to take concreteaction to counter the trend.

One specific case where US policy could have a significant impact is Cuba, a state that hasalways followed a course of its own. A lifting of the economic embargo imposed on the islandcould have significant positive economic repercussions, though its political effect is less clear.Raúl Castro has kept a firm grip on power since taking over from his brother Fidel and hasshown an expected degree of pragmatism, combining a heavily authoritarian stance with a slow,gradual opening of the economy – a trend we expect to continue.

Security: lagging behind

One area where the region is lacking is the failure of improved wealth distribution and economicgrowth to translate into greater security. In many cases, companies continue to face the samekind of threats that they faced five or ten years ago, and significant improvements are unlikely.

With the clear exception of Colombia, where the security environment has significantly improvedduring Uribe’s tenure, security conditions in most Latin American countries have remained broadlyunchanged, or deteriorated. Mexico has grabbed the headlines, with battles between drug gangsand government forces and the continuing rise in kidnapping. Even though the press exaggeratesthe impact on businesses (and the wider threat to the state), the government’s lack of success in


fighting organised crime is troubling. In Central America, Guatemala and Honduras present aneven worse scenario, with the additional risk of becoming failed states in the medium-to-longterm. Crime continues to plague Brazil’s urban centres, while once-tranquil Buenos Aires hasseen a rise in both common and organised crime. Perhaps the worst deterioration of all hashappened in Venezuela, a country that ten years ago was relatively safe, but that now tops thecharts in terms of crime rates.

There is little prospect of improvement over the course of 2010. Governments have not beenable to implement the structural changes needed and an effective long-term strategy would entailcostly public policies that lack the short-term benefits that might endear them to politicians. Insome countries, insecurity has become so ingrained that it is no longer a political issue at electiontime: there is no value in addressing it. Security has barely been mentioned in early phases ofcampaigning for Brazil’s 2010 presidential election. Neither the ruling Workers’ Party (PT) nor itsmain adversary, the Brazilian Social Democratic Party (PSDB), seem to believe that they canextract political benefits by campaigning on the issue. Even though this is somewhat specific tothe Brazilian context, it nevertheless highlights what can happen in other countries once theproblem goes unaddressed for too long.

While Latin America does deserve some praise for weathering the storm so well, the road aheadwill be anything but easy for both governments and investors. The relatively successful handlingof the financial crisis was a turning point for the region, but one that will bring new challenges,especially the implementation of microeconomic reforms. Governments have yet to show thepolitical will that such reforms demand, and are unlikely to do so in the year ahead. In our view,while opportunities in several sectors – for example oil and gas, telecommunications and thebanking industry – will inevitably arise in the context of an economic recovery, progress will beslower than many expect. Investors will have to be careful in 2010 not to be caught again by aherd mentality, this time an optimistic one.

Asia

Asia came through the worst of the recent global financial and economic turmoil better than mostpeople expected, to end the year as the brightest spot on a very gloomy map of the world economy.The region’s rebound will strengthen in 2010, reinforcing Asia’s stand-out status as the leadingdestination for businesses and investors in search of growth. India, and above all China, will remainthe key to this outlook, growing at rates above 6% and 8% respectively.

The economic performance and relative political stability of Asia’s leading economies will sustainresurgent excitement about the ‘Asian century’ as it enters its second decade. Underlying thiscliché is a very real long-term trend, visible in the business, economic, political and securityspheres, and amplified by the financial crisis. The year ahead will bring more manifestations ofAsia’s rise, and above all China’s, but the accompanying hype threatens to mask the fact that, aswell as growth and opportunity, there are also plenty of political, economic, security and businessrisks ahead for Asia in 2010.

Growth and risk

In the second half of 2008, the atmosphere of near-panic about the global economy caused mostpundits to rush into excessively gloomy predictions about Asia’s 2009 prospects. In the secondhalf of 2009, with the mood dominated by Asia’s striking resilience compared with other regions,the temptation instead is towards excessive optimism.

Overall, the outlook is certainly relatively bright, and not only because of China and India. Japan,still Asia’s largest economy, will remain anaemic, but should manage to shake off further recession.Indonesia will continue to impress on both the economic and political fronts, and the ‘Asian tigers’(South Korea, Taiwan, Hong Kong and Singapore), Thailand and Malaysia are all set to reboundfrom sharp recessions in 2009 to post significant positive growth in 2010. Among smaller economies,countries like Vietnam and Bangladesh continued to grow rapidly despite the crisis and are expectedto expand at rates well over 5% in 2010, while countries as diverse as Mongolia and Papua NewGuinea may be moving towards greater realisation of long-recognised resource potential.

PAGE 45RISKMAP 2010

Stimulant addiction

This outlook is the cause of justifiable optimism, but is only part of the 2010 story. Asia’s resiliencehas been a reminder that healthy developing economies, especially in the region, have strongunderlying growth beyond exports, but it is certainly not evidence of some sudden new self-reliance.Export demand and capital supply from developed Western economies are still major factors formost, especially East Asian, economies. Asia’s resilience is mainly explained not by an explosionof demand and trade within the region, but by the more straightforward factors we highlighted inRiskMap 2009: relatively sound financial systems and balance sheets, little exposure to ‘toxicassets’ going into the crisis, and governments willing and able to launch swift and aggressivestimulus responses.

But sooner or later, that stimulus will have to be phased out. It remains far from clear that privateinvestment and consumption will soon recover to support rapid growth without large-scale stimulus.Millions of Asians have lost their jobs, exports will make no rapid return to pre-crisis levels, andmost economies are plagued by over-capacity. So, while GDP growth rates are picking up strongly,job creation, and private investment and consumption could prove more elusive. Asia’s policy-makersare well aware of the risks to recovery, but face serious dilemmas. Fear of another slump willbring great caution in tightening fiscal and monetary policies, but too much caution could see inflationproblems return. Countries such as China could see a return of worrying asset-price inflation, whileconsumer price inflation may rise in India, Pakistan and Vietnam, where concerns over food pricesare never far away. Continued aggressive stimulus spending could also put pressure on the healthybalance sheets and financial systems that made Asia resilient to the crisis in the first place.

Political pressures

Most countries are likely to manage these dilemmas reasonably well and achieve solid growth asexpected. However, If the US and EU recoveries falter or further financial shocks occur, Asia’srebound could look less assured by late 2010. China is the only Asian economy that really offersa substantial demand buffer and it is more vital than ever before to the performance of its neighbours.But China is itself a prime example of some of the challenges facing regional governments. It mustrebalance its economy to derive more growth from private domestic sources rather than governmentspending and exports, and must reduce industrial over-capacity and undertake major financialreforms; all these tasks entail major social and political costs.

In China and elsewhere, rather than celebrating their recovery, leaders will be feeling strong domesticpolitical pressures to address short-term concerns about supporting growth and employment. Thewidely recognised long-term need for rebalancing and reform will often come second, and protectionisttendencies will be a persistent risk. Yet the region will prove a mixed bag of reform and resistance,and some countries will manage to implement some liberalising steps in an attempt to boostgrowth. Examples of this in 2009 have included South Korea’s free-trade agreement (FTA) withthe EU and Malaysia’s services sector liberalisation. Such moves will create further opportunitiesfor foreign investors in 2010, including in the key markets of China, India and Indonesia. Theprospect of growth in local markets, and relatively cash-rich Asian players (not least governments)looking for bargains in developed markets, will also mean the region remains a key player inmergers and acquisitions activity in 2010.

In most major economies, relative political stability remains an important pillar of continuing strongeconomic prospects. The emergence of governments with strengthened mandates in India andIndonesia in 2009 has paved the way for a period of greater political stability and policy consistency,while in Japan the Democratic Party of Japan (DPJ)’s election victory after decades of almostunbroken Liberal Democratic Party (LDP) rule could bring new impetus for reform. But at theother end of the scale, a few countries face far more fundamental and severe challenges thanmanaging incremental economic policy adjustments and reforms.

Notably, in Pakistan – a key stability concern for the coming year – the urgency of finding solutionsto more serious problems will be particularly acute, given the fragility of the economy, and thepotential implications for an equally brittle political and security environment. The outlook forPresident Asif Ali Zardari is uncertain given his isolation and unpopularity; the opposition will continueto position itself to benefit from further blows to government credibility, but an overt militarytakeover is not expected in the near term.


Testing transitions

Indeed, if 2009 was the year of stable political transitions among Asia’s major democracies (India,Japan and Indonesia), then 2010 brings the prospect of less secure change among some of theregion’s more troubled and intransigent states. Burma (Myanmar) and Afghanistan will beundergoing unstable political transitions, with parliamentary elections in both states likely to bemarred by allegations of voter intimidation, electoral manipulation and, certainly in the latter case,violence. The Philippines and Sri Lanka are also set for political turbulence in the coming year:the current administration in Manila must be replaced (with presidential, parliamentary and localelections scheduled to take place in May), while the incumbent government in Colombo facesparliamentary elections by April, and possibly a presidential election thereafter.

Meanwhile, the political scene in Malaysia and Bangladesh will remain precarious amid theincreasingly heated and confrontational relationships between ruling and opposition groups, withthe latter actively attempting to undermine the former through coalition defections and popularunrest. In Bangladesh, this friction will put persistent pressure on efforts to consolidate the country’sreturn to democracy in 2009, and cast doubt on its ability to fulfil its considerable economicpotential. In Malaysia, with the main opposition leader preoccupied with a legal battle, PrimeMinister Najib Razak may feel strong enough to call an early election in late 2010, but this couldbring a fierce and unpredictable contest. Elsewhere, Nepal will struggle to meet a deadline to drafta new constitution by May as disputes continue between Maoist insurgents-turned-politicians andthe ruling multi-party coalition, putting the peace process under way since 2006 under strain.

Finally, while 2010 may very well pass with both men still firmly on the scene, the deterioratinghealth of North Korean leader Kim Jong-il and Thailand’s king will be a considerable source ofpolitical uncertainty – and potential instability – for their respective countries. Kim Jong-il hasrecovered for now from serious health problems, but were he to become unable to lead, the risksof destabilisation would greatly increase, while succession planning is a highly tense and uncertainprocess. Similarly, rumours about succession and the king’s health will persist in Thailand in2010, generating jitters over economic and political security and the prospect of another militarycoup. While the military is satisfied with indirect influence for now, it would almost certainly stepin should supporters of deposed former premier Thaksin Shinawatra seek to exploit instability ina succession scenario.

Persistent insurgencies, intractable conflicts

Advances by extremists in Afghanistan and Pakistan will continue to alarm in 2010, with implicationsreaching far beyond the borders of each state. Authorities in Pakistan face a battle to contain Islamistextremists in safe havens in the tribal areas of the north-west and to prevent a further intensificationof their hold on parts of Sindh and Punjab, as well as Baluchistan. The state is not under threat,but militants will continue to challenge its authority and trouble the US administration that has madestabilising this region a top priority. In Afghanistan, a larger presence of foreign troops will not silenceinsurgent groups. Operating from a position of strength, they have no incentive to take part innegotiations. But militant safe havens on the Afghanistan-Pakistan border have a limited direct impacton insurgencies elsewhere in Asia, despite their role as sites and exporters of training, expertise,planning, motivation and recruitment to militants with a multitude of backgrounds and objectives.

While there is evidence of some communication between, for example, the regional extremistJemaah Islamiyah (JI) in Indonesia, Muslim separatists in southern Thailand and the Philippines,and al-Qaida, militant and insurgent activity will remain in most cases local in motivation and execution.Fears that the separatist insurgency in Thailand could morph into an Islamist jihad are dwarfedby the reality that in the near term the campaign will remain first and foremost a struggle forself-representation, with a limited impact on the national business environment. All the same, thepotency of a brand of Islamist extremism with widespread appeal means the spectre of terroristattack continues to hang over key cities across the region. While it is striking that India hasescaped a major terrorist incident since the Mumbai attacks of November 2008, carnage returnedto the Indonesian capital in mid-2009 with the first terrorist strike in the country since 2005. Bothremain vulnerable to being hit again in the immediate term.

Confidence in state-led counter-terrorism initiatives across the region is limited. In Indonesia, theauthorities have, with a flurry of action since the Jakarta hotel bombings of July 2009, begun to

PAGE 47RISKMAP 2010

re-earn the plaudits won in recent years for effective efforts to defeat the numerous splinter cellsand offshoots of JI prior to the strikes. But such successes belie a longer-term challenge to stayon top of well-entrenched terrorist networks that, as the Jakarta attacks showed, have in someareas far greater support than was initially understood.

Improvements in Indian security infrastructure can only partially account for the absence of a majorterrorist attack on Indian soil in 2009. Hosting the Commonwealth Games in Delhi in 2010 will bea key test for India’s authorities, under pressure to improve problems related to intelligence-sharingand rapid response capacity. And while increasing radicalisation among its millions of Muslimsposes a genuine threat to stability, an extreme leftist insurgency also threatens to deepen and widen.

The fluidity of militant identities will complicate government efforts to counter terrorism. Difficultiesare illustrated by claims of responsibility for attacks from little-known or obscure groups such as theIndian Mujahideen/Deccan Mujahideen in India or the Baluchistan Liberation United Front (BLUF)in Pakistan, or by the provision of a safe haven by one group for another, as in the case of the Morofronts and the Abu Sayyaf group in the southern Philippines. There too, the communist New People’sArmy faces disassembly from the edges, but remains a threat in rural areas beyond state control. TheSri Lankan government will hope that its military defeat of the separatist guerrilla Liberation Tigers ofTamil Eelam (LTTE) sets a precedent for states battling insurgent groups. But the all-out military effortwas costly in lives and funds, and has produced unsatisfactory results in that its treatment of Tamilshas created the conditions for further conflict. The struggle for self-rule is likely to continue insome form.

The Asian century turns ten

Amid all these problems and risks, growth and opportunities will persist and the fundamentalchallenges for foreign business leaders in Asia remain the same. They face intense pressure tostay ahead of trends, adjust to and profit from the region’s rise, and compete in very differentoperating environments, while upholding global corporate standards to manage potentially severerisks. As the ‘Asian century’ turns ten, most local markets are no longer so alien, and many leadingforeign businesses are already well established. But for new entrants and veteran Asia playersalike, the balancing act required for long-term success in the increasingly complex, competitivemarkets is getting more, not less, difficult. Distinguishing between hype and reality, risk andopportunity will continue to demand strong understanding and attention.

Europe and the CIS

As the world shifts back into positive growth and a number of significant economies follow suit –France and Germany saw their recessions end in mid-2009 – it appears that recovery is ahead.Governments across the region have used bailouts, stimulus packages and other measures tomaintain a semblance of normality, and the extent of this state intervention will be a key issue for 2010.

West put to the test

Western Europe’s post-crisis economy is unlikely to differ greatly from its pre-crisis economy interms of state involvement. Talk of ‘new economic paradigms’ is largely superficial, used by politiciansto suggest that they represent change at a time when the status quo is bad. The region will notdesert the pattern of liberal market economics with varying degrees of social support that hasdeveloped over the last 30 years.

But whether they like it or not – and most do not – a number of governments have been left withsignificant chunks of equity in key sectors, notably banking. In all but the most extreme cases(Iceland and Ireland), we believe that governments will make little use of these stakes, and inmany cases downplay their significance entirely. Even examples with a newly heavy state presencelike the British banking sector are unlikely to see the government insist on day-to-day policydirection. Hints and persuasion will have a greater role than the government’s representative in theboardroom, if there is one.

In countries with struggling centre-left administrations, such as Spain and the UK, the oppositionis talking up concern over the size and persistence of public debt forecasts. The British Conservatives,set to come to power in May/June 2010, are particularly keen both to pay down this debt and to


reduce the state’s role in the economy. They will seek to divest government holdings as soon asis practical, and will brush off concerns that holding on for longer or taking a more active role inbanks’ futures might represent better value.

Elsewhere, satisfaction at the supposed failure of the ‘Anglo-Saxon economic model’ is of scantconsolation when the likes of Fortis, Dexia and Hypo Real Estate have had to be taken into partialor total state ownership. These institutions will work hard to move out of government ownershipin the early years of the recovery, and governments will be broadly happy to let them. Stateinvolvement will be muted, understated and as short-lived as possible.

The exception will be the hardest-hit countries, where the question is not so much about thestate’s role in the economy, but about the economy’s role in the state. Iceland, with its total bankbailout, and Ireland, with its ‘bad bank’, have no choice but to have greater state involvement.Because of its balance sheet – and increasing disenchantment with the IMF – Iceland will haveto go it alone for some time, even if it secures EU membership by 2013, and this means the statewill remain involved. Ireland needs property prices to rise across the board by 10% from currentlevels within ten years to come close to breaking even on its bad bank plan. Both countries facea long – and interventionist – haul.

CEE-ing it through

In Central and Eastern Europe (CEE), governments intervened rather less than further west,largely because they could not afford to. Their pre-crisis fiscal positions were generally weaker,particularly in the cases of Hungary and Romania. Lower credit ratings and higher risk profilesrelative to Western European countries (that were also issuing huge quantities of debt) reducedaccess to capital markets. The region survived without large-scale bank bailouts, though governments tried to support banks through regulatory measures.

The increase in the state’s economic share has been more a result of a shrinking private sectorthan increased intervention. The long-awaited expansion in small and medium-sized enterprisesseen in the second half of the 2000s came to a juddering halt, with an unprecedented number ofbankruptcies and defaults. But the state’s role in the economy is as strong as ever. Few governmentshave used the crisis as an opportunity to restructure their oversized and inefficient public sectors,which remain a chronic burden in countries such as Croatia, Hungary or even Poland. Secondly,in most CEE countries domestic business groups have strong state links – often through controlof the local public administration – and are able to obtain undue benefits and preferential contracts.The state is there to stay, and will continue to affect business operations both directly and indirectly,though less than in places further east.

Baltic blues

Latvia may have attracted most headlines, but all three Baltic states have been hit hard. Buoyedby years of double-digit growth, their economies developed structural imbalances that translatedinto severe recessions once the crisis hit. But despite dire economic and fiscal conditions,governments have gritted their teeth and maintained their currency pegs to the euro in the hopeof joining the eurozone as soon as possible. The involvement of the IMF and/or the EU – traditionallyforces for privatisation rather than nationalisation – in their recovery plans will limit the potentialfor state intervention, while ensuring that fiscal policies will be carefully managed and regulated.

The Baltic states have already shown that they are willing to risk unpopularity by favouring austerityover a loosening of fiscal policy, but 2010 will test their commitment. Latvia, whose governmenttoppled in February amid social discontent over anti-crisis measures, again faces a period ofpolitical instability after the largest party in the governing coalition reneged on promises to raisetaxes, threatening the IMF bail out. In Estonia, the government is struggling to cut spending toreduce the budget deficit in line with eurozone requirements, with aggressive cuts pushing publicsupport towards leftist parties with less enthusiasm for stringent fiscal policy. Lithuania appearsbest off, with a popular president seemingly able to keep the country’s focus on the euro prize.

PAGE 49RISKMAP 2010

Russia and Ukraine

Despite being one of the hardest hit of the G20, Russia has maintained basic economic and politicalstability by drawing on its large reserve funds, aided by the recession’s short duration. But thecrisis has thrown into greater relief long-standing structural weaknesses: a high dependency onenergy exports, widespread corruption and unreliable rule of law. The greatest shortcoming – andkey to all the others – is the state’s dominant role in politics and the economy, which allowsbureaucrats, politicians, courts and the security services to operate with minimal accountability.

The use of the oil reserve fund to support business and society through the recession has onlyincreased reliance on this paternalistic system. This will continue into 2010, though funds mayrun out at some point during the year, with the peak oil prices that fed the reserve long gone; thegovernment has provided for tax increases and international borrowing when this happens.

The business environment will remain characterised by the familiar problems mentioned above,but without pre-crisis growth rates to sugar the pill. State-loyal oligarchs will continue to dominatethe economy. The state has not used the crisis as a pretext to continue expanding its presence inlucrative sectors – notably energy and mining – but equally it has not pushed market principles.Much of the anti-crisis strategy has involved subsidising poor performers (such as car-makerAvtoVAZ) in an attempt to contain unemployment and prevent social problems: the governmenthas favoured social stability over the more radical option of allowing inefficient enterprises to gounder to encourage longer-term competitiveness.

The Ukrainian state’s fundamental weakness is more an issue than its economic activities.Constitutional reforms enacted after the Orange Revolution created ambiguity between the rolesand powers of the presidency and the government. Combined with internecine factional struggles,this reduced the country to a state of political paralysis throughout 2009, hindering any systematicresponse to the recession. It even prompted serious talk in the EU and Russia of the Ukrainianstate handing management of its gas transit network to an EU-Russia consortium, a rare exampleof a European state potentially disempowered by the crisis.

There is potential for the presidential election due in January 2010 to unblock the system, resetrelations with Russia and enable a co-ordinated approach to tackling the steep decline thatbrought Ukraine to the brink of sovereign default in 2009. The outcome remains in the balance,causing further delays to essential reforms as the government turns to short-term pre-electionpopulism. A tight, disputed result would prolong the gridlock and hamper economic recovery.

Centralising or ceding control

Governments and state entities across Central Asia and the South Caucasus intervened to stabilisetheir economies, either through loosening monetary policy, increasing benefits and public-sectorwages, or devaluing currency. However, particularly in hydrocarbons-rich countries, the crisis alsoresulted in an acceleration and deepening of the state’s reassertion of power in key sectors. Ascountries emerge from the crisis, this trend is unlikely to reverse.

In Kazakhstan, high oil prices in the pre-crisis years enabled the state to claw back influence in theoil and gas sector by increasing the role of national champion KazMunayGaz (KMG). While thegovernment has drawn back from a plan to impose a massive duty on oil exports, for fear of investorsclosing off production on cost grounds, the trend of maximising revenue from natural resources willpersist. Foreign companies will be forced to accept a large role for KMG in all future projects; othernatural-resource sectors, such as mining, will see similar developments. The government has madeno secret of the fact that state involvement is part of its long-term industrial development policy.

A similar trend is likely in Azerbaijan, with the government taking an increasingly bold line withinvestors, and political and economic power continuing to concentrate in fewer and fewer hands.As in Kazakhstan, the role of state oil and gas champion SOCAR is gradually expanding, whileeven nominally private companies are owned by politically connected individuals, resulting in ahighly uncompetitive investment climate.


The crisis has had little discernible impact on state-business relations in Turkmenistan. Officialrecognition that foreign investment was necessary to develop the country’s technically challenginghydrocarbons fields came as early as 2007, though the state will continue to favour government-to-government contracts, complicating conditions for private companies. Similarly, in Uzbekistanmuch foreign investment comes from state-owned entities, while private companies have longresented aggressive and intrusive state practices.

For smaller countries with few resources, the downturn reinforced government reliance on externalsupport. Armenia, Kyrgyzstan and Tajikistan all received large inflows of foreign multilateral andbilateral assistance: the Chinese and Russian states have acquired key roles in the economy asa result. In Georgia, the war with Russia will continue to overshadow the financial crisis in termsof impact on business. Georgia has largely weathered the economic storm thanks to a $4.5bndonor assistance package that will enable the authorities to retain their emphasis on ‘smallgovernment’. Problems of implementation will persist, partly stemming from the sheer number ofregulatory and legal changes that have been approved in a relatively short space of time.

Middle East and North Africa

While the rest of the world has been preoccupied with the global recession, politics has remainedthe primary focus in the Middle East. Developments across the region in recent years haveemphasised the primacy of political over purely economic issues in generating large-scale politicalinstability. For example, incidents of economically inspired unrest in Iran in recent years pale intoinsignificance compared with the protests in 2009 against the perceived fraudulent re-election ofPresident Mahmoud Ahmadinejad.

This trend will continue in 2010, with elections in Iraq in January and Sudan in April potentiallyproviding a focal point for already significant political tensions at the local, regional and nationallevels. In southern Sudan’s heavily militarised environment, electoral rivalry is likely to translateinto localised violence; given the central and southern governments’ attempts to manipulate theballot, results are likely to be contested, raising the risk of a serious post-election political crisis.In Iraq, meanwhile, extremists are likely to use the country’s parliamentary elections to stoke tensionsamong ethnic groups, particularly in northern Iraq, Baghdad and disputed territories bordering thenorthern Kurdistan Region, by carrying out a renewed campaign against ‘soft’ – particularlycivilian – targets. The spike in violence will be aimed at derailing the political process, which iscurrently limiting foreign extremists’ room for manoeuvre, and compromising the US military’scommitment to withdraw from the country under the terms of the Status of Forces Agreement.

The EU – still in search of a role

The EU has made ambitious noises throughout the crisis, seeing the chance for a role inshaping the future European economy. But nobody seems sure what that role will be. TheG20 has largely supplanted it in terms of multilateral ‘thought leadership’, and much of theenergy that could have been devoted to generating consensus on issues such as bankingreform or remuneration has gone into ensuring ratification of the Lisbon Treaty.

With markets and fiscal positions far removed from the relative stability of the mid-2000s,the EU’s functions of competition regulator and fiscal overseer are in a quandary. TheStability and Growth Pact’s budget deficit limit of 3.0% of GDP has long been the cornerstoneof Europe’s fiscal architecture, but has been quietly, if temporarily, forgotten as tax revenueshave fallen and stimulus packages have kicked in.

German state aid to troubled car-maker Opel and its new owner, parts-maker Magna, willtest EU effectiveness. The government plans to support Magna’s operation with up to€4.5bn, on condition that German jobs are first in line to be protected from likely wide-rangingcuts. If re-elected German Chancellor Angela Merkel sends such a package to the EU forconsideration, the new competition commissioner will face a tough baptism: either rejectGerman demands and risk alienating the largest member state, or fudge a solution andpotentially alienate several others. As ever, the EU will be far too busy with its internal battlesto go looking for new wars to fight.

PAGE 51RISKMAP 2010

Escaping the crisis

Much of the region appears to have emerged from the global economic crisis comparativelyunscathed, in many cases shielded from the worst effects by the conservatism of regional bankingsystems. Major oil-producers in particular escaped significant damage because of a swift reboundin oil prices and, while non-oil producers fared less well, they have largely avoided significantdownturn-inspired political instability or serious socio-economic unrest. However, central banksand sovereign wealth funds in the Gulf were forced to disburse large surpluses to save less cautiousneighbours such as Dubai, which had over-leveraged itself in its frenzied race for development,and the effects of the downturn will continue to reverberate in the coming year.

Resource-poor…

Governments in resource-poor countries that attempted to follow the West in using expansive –and expensive – fiscal policy to counter the effects of the downturn will, in common with manyother countries, have to start reining in spending in 2010 or face serious sustainability questions.Turkey’s government in particular faces a tough choice between spooking international marketsor restoring fiscal discipline and potentially alienating voters ahead of parliamentary elections in2011. The government has already announced plans for cuts, some of which will affect internationalcompanies which rely on government projects and spending, though it remains to be seen whetherthese will be sufficiently swift or wide-ranging to quell investors’ doubts. The government riskssatisfying no one, potentially opening itself up to further attacks by the secularist establishment.

Although boosted by a return to co-operation with the international community and the likely unfreezingof foreign aid, Mauritania will also have to take steps to reverse populist spending rises introducedin the wake of the country’s 2008 military coup; according to the IMF, these have resulted in aserious deterioration in public finances. Elsewhere, both Morocco and Egypt will suffer from lowerexport and tourism revenues, and also their persistent inability to eliminate wide-ranging subsidies,in large part because of unrest generated by past attempts to reform their subsidy systems.Jordan, which the IMF expects to experience a 3% contraction in GDP in 2009, is likely to continueto pursue expansionary fiscal policies to offset the impact of the slowdown, though the lifting offuel subsidies during the boom years should help to reduce its vulnerability to external shocks.

Lebanon appears to have successfully weathered two separate storms, namely the global economicdownturn and persistent political instability, and bucked global trends in 2008 and 2009 with twoyears of stellar economic growth. In addition, the banking sector has attracted investmentbecause of state backing and a reputation for conservative practices that have helped to shield itfrom external shocks. However, the long-term threat of renewed conflict between Shia movementHizbullah and Israel, which the economy would not be able to shake off so easily, or protractedclashes between domestic armed groups, will remain a latent concern in 2010.

...and resource-rich

Oil-rich countries face different dynamics. This is particularly the case in Iraq, where global oilprices and developments in the security environment will be the two key drivers of the economy.The qualified rebound of the oil price, should it be sustained in 2010, will enable Prime MinisterNuri al-Maliki’s government to continue to invest in security, though at the expense of much-needed investment in areas such as infrastructure. The continued withdrawal of US forces in2010 will present a significant challenge to the government, particularly if groups affiliated withunsuccessful political coalitions are excluded from power once January’s scheduled parliamentaryelections have been held, leaving them with little option other than to revert to violence.

The next government will have to divert considerable resources to develop the capacity of thecountry’s intelligence and security services to meet a sustained spike in political violence.Diverting resources towards security provision will mean that funds intended for other sectors,including infrastructure, health and education, will dry up. Businesses operating in these sectorsmay experience an increase in political risks in 2010 as issues such as contract frustration andnon-payment become more frequent, while gaps in security provision may appear in other areasof the country, heightening the overall level of threat facing foreign businesses.


The financial crisis has not shaken the legitimacy or stability of the Gulf states, where governmentsswiftly and actively reacted to the downturn, rapidly bailing out banks and real-estate developers.Nonetheless, the downturn highlighted latent but intrinsic weaknesses in the region’s businessenvironment, which are likely to have an impact on investor confidence in 2010, regardless of thebenefits that remain to be reaped. For example, a scandal involving two prominent Saudi Arabianfamily-owned conglomerates in 2009 crudely exposed the absence of transparency and regulationin the banking system, while also pointing to the inefficient and corrupt system of money-borrowingby family businesses in the region. Further repercussions, in the form of difficulties in accessingcapital for similar conglomerates and possibly further major insolvencies are likely in 2010.

Coming in from the cold?

US policy will be key in determining which regional countries move towards shedding their statusas international ‘pariahs’ in 2010. While Obama’s emphasis on engagement and diplomacy hasraised hopes across the board, more hawkish voices within the US administration are likely toprevail on Iran and Sudan, exacerbating political, operational and reputational risks for foreignbusiness. There is, however, greater room for a thaw in relations between Syria and the US.

Sanctions likely to replace engagement in Iran

Despite encouraging signs in October 2009 in the form of a mooted deal to remove stocks oflow-enriched uranium from Iran, an eventual failure of negotiated efforts to resolve the disputeover the country’s nuclear programme remains the most likely scenario. Much will depend onwhether the Obama administration is willing to allow Iran to continue enriching uranium withoutinterruption (given that it appears very unlikely to stop) and whether or not Iran will permit a farmore intrusive inspections regime. Both are possible, but on balance both boxes are unlikely tobe ticked.

Obama is likely to feel that he has little choice but to let ‘liberal hawks’ pursue their aggressivesanctions agenda from mid-2010 onwards. However, while he has managed to marshal a significantlymore unified international front against Iran’s nuclear programme than in previous years, Russiaand China are unlikely to sign up for anything like ‘crippling’ sanctions, and a significant intensification of current UN sanctions consequently remains unlikely in 2010. A coalition oflargely Western countries is likely to seek to intensify bilateral sanctions, but few will be willing togo as far as the US, threatening international unity over Iran. Although Obama seems scepticalabout the utility of sanctions, he is likely to be forced to allow Congress to put forward at leastsome additional unilateral sanctions in 2010 in the absence of a major breakthrough.

Sudan out, Syria in?

Although new measures such as additional sanctions are not on the horizon, we do not expectUS ties with Sudan to improve in 2010. As the Sudanese government remains unmoved in theabsence of genuine incentives, the US administration’s attitude is likely to harden, reducingalready limited prospects for an easing of sanctions- and divestment-related risks to business. By diminishing the central government’s willingness to co-operate and encouraging grandstandingby the southern regional government, a colder US approach would risk exacerbating north/southtensions, potentially reversing mediation progress made by US envoy Scott Gration. However,with little real fighting currently occurring in Darfur, additional pressure looks unlikely.

Despite speculation that Obama has already grown weary of trying to engage Syria and thatrelations are souring, we believe that the US remains committed to engagement, though asan adjunct to the Israel/Palestine conflict and, most importantly, the Iranian nuclear dispute,rather than a priority in itself. Nevertheless, even if Iran-US dialogue fails – our most likelyscenario – we believe that progress will be made in some areas in 2010, specifically overmatters of intelligence-sharing and securing the border between Syria and Iraq. In exchange,the US is likely to review sanctions against Syria with a view to lifting some of the more obtrusive measures.

PAGE 53RISKMAP 2010

No breakthrough on Israel/Palestine

While there is a chance of talks and possibly even progress or agreement on a number of secondaryissues in 2010, prospects for a comprehensive and implementable Israel-Palestine peace dealwill remain as remote as ever. With a right-wing coalition in power in Israel and the Fatah-ledPalestinian Authority (PA) worried about being outflanked by Hamas, US efforts to force the twosides together will remain pivotal if progress is to be achieved, as Obama appears keenly aware.

Having seen his initial efforts run into trouble early on, with Israel more or less rebuffing hisdemand for a settlement freeze, Obama is likely to take a different approach in 2010. This couldsee him push for immediate final-status negotiations despite PA President Mahmoud Abbas’sinsistence on a settlement freeze first. However, this would make Abbas look weaker still andlimit his room to make concessions. Israel’s government also looks unlikely to make significantconcessions of its own free will, and is likely to be less fearful of major US pressure following thesettlement dispute. With battles over health care and US congressional elections loomingtowards the end of the year, the US is likely to become increasingly distracted from the issue.Meanwhile, Arab governments will see little reason to make conciliatory gestures towards Israelin the absence of wider progress on the peace process.

Militant threats

The merger of Saudi and Yemeni militants announced at the beginning of 2009 will continueto have serious implications for the security environment in the Gulf. The presence of Islamistextremism in Yemen is not new, but the latest generation of militants, operating under theumbrella of al-Qaida in the Arabian Peninsula (AQAP), will continue to prove a sophisticatedadversary with regional ambitions and evolving regional capabilities. However, despite theregion’s reputation as a hotbed of conflict and terrorism, security problems will remain a moderate or minor threat in most countries.

Growing political instability and insecurity in Yemen during 2010 may increase militants’ room formanoeuvre. This will enable AQAP to plan increasingly complex operations both in Yemen andalso against a widening array of targets across the Gulf. In Yemen, AQAP will continue to targetgovernment, security force and foreign interests; in the wider region, attacks are likely to beaimed at both official and foreign targets, with the numerous prestige construction projects in theGulf providing a range of potentially spectacular targets. A complicating factor might be the arrivalof al-Qaida’s core leadership from the Afghanistan-Pakistan border should the Pakistani government’s military offensive in the country’s tribal regions be successful. Nevertheless, thethreat will remain largely manageable, and attacks are unlikely to have a lasting effect on thebusiness environment.

Elsewhere, al-Qaida in the Islamic Maghreb (QIM), while continuing to pose a serious threat incertain mountainous areas of northern Algeria, remains under constant pressure from the securityforces, which is likely to prevent any significant expansion in the group’s activity. The group alsofaces a more hostile security environment in most of Algeria’s North African neighbours – in contrastto the more permissive environment offered by the Sahel states, and notably Mauritania. In thelatter, extremism has become a pressing problem since 2008, and will continue to pose a threatin 2010, with the emergence of local QIM cells in the country demonstrating the potential for newregional threats to evolve.


Risk rating forecasts for 2010

Risk rating definitions

Political risk

Political risk evaluates the likelihood of state or non-state political

actors negatively affecting business operations in a country through

regime instability or direct/indirect interference, and also evaluates

the influence of societal and structural factors on business. State

actors can include domestic and foreign governments, parliament,

the judiciary, regulatory bodies, state and local administrations and

the security forces. Non-state actors can include insurgent groups,

labour forces, campaign groups, lobbies, other companies, organised

criminal groups and international organisations. Societal and structural

factors can include corruption, infrastructure, ease of establishing and

maintaining a functioning business, and bureaucratic and business

culture. The impact on companies can include judicial insecurity,

corruption, reputational damage, expropriation and nationalisation,

contract uncertainty, international sanctions, bureaucratic delay,

partiality in contract and tender awards, campaigns and protests.

Political risk may vary for companies and investment projects according

to factors such as industry sector and investor nationality.

INSIGNIFICANT

The environment for business is benign. For example: political stability

is assured, investor-friendly policies are entrenched, there is no threat

of contract re-negotiation or repudiation and infrastructure for business

is excellent.

LOW

Political and operating conditions are broadly positive. Occasional and/or

low-level challenges do not significantly impede business. For example:

government policies are investor-friendly with some exceptions, contracts

are generally respected, non-state actors have little adverse influence

over government decisions, infrastructure is generally robust or there is

little risk of reputational damage.

MEDIUM

While the environment provides generally sound conditions for

business, significant challenges can and do emerge. For example:

hostile lobby groups exert disproportionate influence over government

policy, political instability delays essential reforms, contracts are

subject to uncertainty or occasional change, elements of the

infrastructure are deficient, or the activity of unions or protest

groups impede operations.

HIGH

The political and operating environment presents persistent and

serious challenges for business. For example: there is a credible

risk of contract repudiation or re-negotiation by state actors, political

instability threatens fundamental alterations to the nature of the

state, government policy is capricious or harmful to business,

corruption is endemic across all levels of officialdom, or regulations

are onerous and their implementation is capricious.

EXTREME

Conditions are hostile for business. For example: direct intervention

such as nationalisation or expropriation of assets is likely, systemic

political instability leads to the absence of rule of law, the nature of

the regime brings severe reputational risks, government structures

are inadequate, infrastructure is almost entirely deficient or major

reputational damage is certain.

Security risk

Security risk evaluates the likelihood of state or non-state actors

engaging in actions that harm the financial, physical and human

assets of a company, and the extent to which the state is willing and

able to protect those assets. Actors that may pose a security risk to

companies can include political extremists, direct action groups, the

security forces, foreign armies, insurgents, petty and organised

criminals, protesters, workforces, local communities, indigenous

groups, corrupt officials, business partners, and in-country company

management and staff. The impact of security risk on companies

can include war damage, theft, injury, kidnap, death, destruction of

assets, information theft, extortion, fraud, loss of control over business,

and disruption to operations caused by damage or denial of access

to buildings or vital infrastructure caused by terrorist attacks, threats

or official responses. Security risk may vary for companies and

investment projects according to factors such as industry sector,

investor nationality and geographic location.

INSIGNIFICANT

The security environment for business is benign. For example: the

authorities provide effective security, there is virtually no political

violence, public disorder is rare and there are no known active

domestic groups or issues likely to fuel terrorism.

LOW

Security conditions are broadly positive and occasional and/or low-

level challenges do not significantly impede business. For example:

the authorities provide adequate security, organised crime only

marginally affects business and protest activity rarely escalates into

threatened or actual violence. Rare but large-scale terrorist attacks

may pose indirect threats to personnel or assets, or low-level attacks

do not target business and are not aimed at causing casualties.

MEDIUM

Aspects of the security environment pose challenges to business,

some of which may be serious. For example: there are some

deficiencies in state protection, organised criminal groups frequently

target business through fraud, theft and extortion, domestic terrorist

groups stage regular attacks that cause disruption to (but do not target)

business or there are infrequent large-scale attacks and/or opportunistic

small-scale attacks on foreign or business assets and personnel.

HIGH

The security environment presents persistent and serious challenges

for business; special measures are required. For example: state

protection is very limited, insurgents are engaged in a sustained

campaign affecting business, kidnap poses a severe and persistent

threat to foreign personnel, terrorist groups stage regular attacks

against foreign or business assets, or weak security forces are

incapable of dealing with the terrorist activity.

EXTREME

Security conditions are hostile and approaching a level where

business is untenable. For example: there is no law and order,

there is outright war or civil war, personnel constantly face the

threat of targeted and potentially life-endangering violence, a terrorist

group (or groups) is staging a sustained, high-intensity campaign

that severely hinders business or terrorists frequently target foreign

personnel or business activity.

PAGE 55RISKMAP 2010

COUNTRY

AFRICA

Angola

POLITICAL RISK SECURITY RISK

M

M

M M

M; H in north-east of Cabinda exclave

L; M on Nigerian border

H L; M in Moroni, Mutsamudu

M M

H H; M in Kinshasa, southern Katanga province; E in Ituri district, Orientale province, North Kivu province (excluding Goma), South Kivu province (excluding Bukavu)

H H

M M; H in Eritrean border region

H M

H M; L in Asmara; H on Ethiopian, Sudanese, Djiboutian borders

M M; H in regions bordering Eritrea, Somalia, Kenya, Sudan

M L

H L

L M

H M

H H

Benin

Burkina Faso

Comoros

Congo (Brazzaville)

Congo (DRC)

Côte d’Ivoire

Djibouti

Equatorial Guinea

Eritrea

Ethiopia

Gabon

Gambia

Ghana

Guinea-Bissau

M M; H in Monrovia, on border with Côte d’IvoireLiberia

M L; M in major urban centresMalawi

L LMauritius

L LNamibia

M MMozambique

Guinea (Conakry)

M MLesotho

H MMadagascar

L L; M in north-east, including Gao and TimbuktuMali

Niger H M; H in northern Agadez region, on borders with Chad, Libya, Nigeria

Botswana L L

H M; H in north-western provincesBurundi

M M; H in Bakassi peninsula, Douala, Yaoundé, Bamenda, far northCameroon

L LCape Verde

H M; H in north-western, north-eastern prefectures, Congo-Sudantri-border area

Central African Republic

H H; E on Sudan borderChad

M M; H in north, areas bordering SudanKenya

M M; H in Niger delta, LagosNigeria

L L: M on borders with Burundi, Congo (DRC)Rwanda

M LSão Tomé

M L; M in Casamance regionSenegal

I ISeychelles

M M; H in FreetownSierra Leone

E; H in Somaliland E; H in SomalilandSomalia


L M; H in deprived urban areas

M M

L; M in Zanzibar archipelago

M

H M

M M; H in northern and north-eastern areas, border areas with Congo (DRC)

M L; M in Lusaka and parts of the Copperbelt

H H; M for central Harare, Bulawayo

L L

M L; M in Buenos Aires, tri-border area

L L

I L

I L

L L

I L

H M

South Africa

Swaziland

Tanzania

Togo

Uganda

Zambia

Zimbabwe

Antigua and Barbuda

Argentina

I IAnguilla

Aruba

Bahamas

Barbados

Belize

Bermuda

I LCanada

L LChile

L L; M on Nicaraguan borderCosta Rica

I IDominica

M LCuba

M L; M in Santo Domingo, SantiagoDominican Republic

M MBrazil

Bolivia

I IBritish Virgin Islands

I LCayman Islands

M M; H in rural areasColombia

AFRICA contd

AMERICAS

COUNTRY POLITICAL RISK SECURITY RISK

Ecuador H L; M in Quito, Guayaquil, Manta; H in Colombian border areas

M MEl Salvador

L LFrench Guiana

L LGrenada

I LGuadeloupe

M M; H in Guatemala City, Mexican border areaGuatemala

L MGuyana

H HHaiti

H MHonduras

L M; H in West Kingston, Spanish Town Jamaica

I LMartinique

M M; H in US border areaMexico

L LNetherlands Antilles

PAGE 57RISKMAP 2010

H L; M in Managua, North Atlantic Autonomous Region (RAAN)

L M; H in Darién province on Colombian border

M L; M in eastern border, tri-border area with Brazil, Argentina

M M; H in Upper Huallaga, Apurímac and Ene valleys

L L

I L

I L

L L

Nicaragua

Panama

Paraguay

Peru

Puerto Rico

St Kitts and Nevis

St Lucia

L L; M in deprived urban areasUnited States

I LUS Virgin Islands

E H; E in south, eastAfghanistan

M M; H in Chittagong Hill TractsBangladesh

I LAustralia

L LBhutan

L M; L in TobagoTrinidad and Tobago

I LSt Vincent and the Grenadines

Suriname

I ITurks and Caicos Islands

L LUruguay

H M; H in Caracas, major urban centres, Colombian border states and Bolivar state

Venezuela

AMERICAS contd

ASIA


Brunei L L

H L; H on borders with China, Bangladesh, ThailandBurma (Myanmar)

M MCambodia

M L; M in non-central districts of cities in Guangdong Province, remote border areas, Xinjiang’s south-western prefectures and regional capital Urumqi

China

M MEast Timor

H MFiji

M M; H in Assam, Manipur, Tripura, Nagaland,Tripura, Kashmir, Bihar, Jharkhand,Chhattisgarh, southern districts of Orissa, northern districts of Andhra Pradesh,western districts of West Bengal, eastern districts of Maharashtra

India

M M; H in Papua, Central Sulawesi, MalukuIndonesia

L LJapan

M MLaos

L LMalaysia

L LMaldives

M MMongolia

H M; H for southNepal

L LNew Caledonia

I LNew Zealand

E LNorth Korea


H H; E in FATA , Afghan border areas

M H

M M; H in south-west Mindanao, Sulu archipelago

M M

Pakistan

Papua New Guinea

Philippines

L LTaiwan

L LTonga

M LVietnam

I IAndorra

L LSouth Korea

I LSingapore

Solomon Islands

M M; H in north, north-eastSri Lanka

M M; H in Narathiwat, Yala, PattaniThailand

L LVanuatu

M L; M in northAlbania

M L; H in Azerbaijani border areasArmenia

ASIA contd

EUROPE/CIS


Austria L L

M M; H in Armenian border areas, Nagorno-KarabakhAzerbaijan

H MBelarus

L LBelgium

M LBosnia and Herzegovina

M LBulgaria

L LCroatia

L; M in Turkish Republic of Northern Cyprus (TRNC)

LCyprus

L LCzech Republic

I I; L in CopenhagenDenmark

L LEstonia

I IFinland

L LFrance

M; H in Abkhazia, South Ossetia, Pankisi Gorge beyond Akhmeta

M; H in Abkhazia, South Ossetia, Pankisi Gorge beyond AkhmetaGeorgia

L LGermany

L L; M in Athens, ThessalonikiGreece

L LHungary

L IIceland

L LIreland

L L; M in southern regions Italy

M LKazakhstan

M MKosovo

PAGE 59RISKMAP 2010

MIDDLE EAST AND NORTH AFRICA

M H

M L

L L

Kyrgyzstan

Latvia

L IMalta

I LMonaco

I ILuxembourg

I ILiechtenstein

Lithuania

M MMacedonia

M; H in Transdniestr L; M in TransdniestrMoldova

M LMontenegro

L LNetherlands

I INorway

L LPoland

L LPortugal

M LRomania

M; H in North Caucasus

M; H in North CaucasusRussia

I ISan Marino

M L; M in Sandzak, Presevo ValleySerbia

M LSlovakia

L LSlovenia

L L; M in Basque CountrySpain

I ISweden

L I; L in Geneva, Zürich, BerneSwitzerland

H H Tajikistan

M MTurkmenistan

M MUkraine

L LUnited Kingdom

H M; H in Tajik border areas, Fergana ValleyUzbekistan

M H, M in main urban centres, southern-oil producing areasAlgeria

L LBahrain

L LEgypt

L L; M on Iraqi borderJordan

H L: M in Sistan-e Baluchistan, north-western border areasIran

L LIsrael

H E; H in south; M in Kurdish RegionIraq

EUROPE/CIS contd


L LKuwait

M MLebanon

M L

H M; H in eastern desert areas

Libya

Mauritania


H in Gaza; M in West Bank

H in Gaza; M in West BankPalestinian Territories

L LOman

L; M in Western Sahara

L; M in Western SaharaMorocco

Qatar L

L

H

M L; M on Iraqi border

L

M

H; E in Darfur, L in northern states

L L

H H; E in Saada, northern Amran province

Saudi Arabia

Sudan

Syria

United Arab Emirates

L LTunisia

Yemen

M L; M in Istanbul, south-eastern cities; H in rural and border areas of eastTurkey

MIDDLE EAST AND NORTH AFRICA contd


RiskMap website

The articles and risk tables in this report were produced by our team of global political risk analysts.They have been written in conjunction with an examination of both the risks and potential rewardsin 173 individual countries looking at the issues that may affect companies and investors over theyear ahead. These forecasts and additional expert analysis are delivered via a free-to-access website.

The RiskMap website includes:

• Country risk forecasts and ratings for the year ahead• Briefings on issues our clients are facing around the world• Additional research reports from Control Risks' PRIME political risk analysis service• An opportunity to sign up for a free trial of our online political and security risk analysis service

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About Control Risks

Control Risks is one of the world’s leading global business risk consultancies. As a trusted adviserto almost three-quarters of the Fortune Global 500, we enable our clients to succeed in complexand hostile environments. We provide the information, advice and practical support they need tomanage the political, security and integrity risks that come with doing business internationally.

Control Risks provides advice and support at every stage of a client’s investment. Our holisticrisk management services are detailed below:

Control Risks is unique in being able to bring together the expertise of our regional political riskanalysts, business intelligence and corporate investigations experts and experienced securityconsultants to offer a fully integrated, information-led approach to the solutions we deliver our clients.

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Pre-exit risk assessment Reputational due diligence Scenario and crisis management planning Executive protection

3

1

5 2

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validating business opportunities

Pre-entry risk assessmentRegional analysis and expertiseScenario planningStrategic risk management

Pre-investment -

identifying

business partners

Business intelligenceDue diligencePolitical risk assessment

Project set-up

Strategic planningStakeholder assessmentStrategic security review

Implementation

Protection of assets (reputation, people, physical security)Corporate social responsibility considerationsSecurity advice and reviewCrisis management planning

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Daily updated political, security andtravel risk analysis and adviceOn-the-ground security managersand co-ordinators24-hour operations support centreConfidential kidnap response servicesBusiness continuity and evacuation planning

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